Receivable financing is when a business receives funding based on its invoices. It is a tool used by many companies to help them survive dry periods between payments.
Receivable financing is essential because not all clients pay immediately upon the completion of services. Some only pay on a set schedule, and as a result, you could be waiting for their payment for up to 90 days. Even when clients pay on time, delays can cause problems with cash flow. Receivable financing is a tool to support businesses with cash flow issues.
Large businesses do not need to worry about late payments. If there is a late payment, they can handle the short-term loss of income. Additionally, if a business fails to make a payment, they have large teams of lawyers to get their money. Unfortunately, small businesses do not have the same luxury.
Small business owners are often victims of late and missing payments. While it is not the fault of the small business owner when a payment is late, they need to prepare for these scenarios.
Unfortunately, it is challenging for small businesses to acquire traditional loans from banks. Most of these loans require collateral that small companies do not have. As a result, receivable financing is the best option for small businesses.
Receivable financing can provide small business owners with solutions to short-term cash flow gaps. You can use this money to pay bills while waiting to pay invoices. Additionally, you can use it to expand more rapidly so that you can make more money in the future.
How Receivables Loan Works
A receivables loan is a revolving line of credit similar to what you have with a credit card. It is an extended line of credit you can borrow against at any time. Small business owners can use this money to pay for inventory, employees, or expansion. Owners can also use a receivable loan when small businesses face short-term cash flow problems.
What Are the Four Common Forms of Receivable Financing?
Receivable financing can come in four common forms. The most common form is traditional factoring. This type of receivable financing has the borrower sell their receivables to a factoring establishment, and that establishment then sells them at a lower price. The price is dependent on the quality of the receivables. Unfortunately, this method can be expensive because of all the extra fees. So, you should only use factoring when 100% necessary.
Asset-backed securities are another type of receivable financing often used by larger businesses. A fixed-income channel supplies coupon-based payments by taking money from clusters of underlying assets. Usually, people or companies will receive funding with their mortgage as the main asset.
Accounts receivable loans are good options for small businesses with short-term cash flow issues. This method allows companies to receive 80% of the current value of their pending receivables. Using this method, the borrower is not at risk because they only use money another owes them. If the company has not paid you the money they owe, the bank will instead go after the company or person who failed to make the payment.
Finally, selective receivable funding is an option for businesses. With this method, companies can receive full payment on their outstanding invoices immediately. Financing rates are usually lower with this method because it does not appear on the balance sheet. Additionally, this method does not affect the company’s other debts.
Factoring Vs Receivable Financing
While there are several types of receivable financing, it mostly comes down to whether you should use factoring or receivable financing. Factoring is the more expensive of the two options, but it is easier to acquire. Established businesses with a long history of good credit and cash
flow are the only entities that can obtain receivable financing. As a result, factoring is a good option for new companies that still need to establish their finances.
Benefits of Receivable Financing
Receivable financing is one of the best options available to businesses with short-term cash flow issues. It can help your business get through periods when payments are late or absent. Notably, there are several great benefits of receivable financing.
Receivable financing can be quickly approved, and as a result, you can receive the funding quickly. Additionally, you do not need collateral to receive this type of financing, and you do not need to do much paperwork.
Furthermore, this type of financing is very flexible, so you can choose the time at which you receive your funding. So, you can use receivable financing to smooth out your cash flow over time.
How to Get Receivable Financing in 2023
So, how does receivables financing work, and how can you get it in 2023? First, you must meet specific requirements. You must own a B2B or B2G business that has been running for at least six months. That business must have a minimum of $50,000 in annual business revenue, creditworthy customers, and outstanding receivables.
If you meet these requirements, you must collect all essential financial documents. Then, you should choose the type of receivables to finance and submit your accounts to a financing application. Depending on the state of your business and its credit, you will receive a receivable advance. Finally, you will need to pay back what was lent to you once your customer pays their invoice.
Receivables Financing Companies in 2023
To get receivable financing, you must apply to a company that supplies it. Fortunately, there are several great receivable financing companies available in 2023. Some good options include FundThrough, First Commercial Credit, Crestmark, Universal Funding Corporation, and Lendio. Each provides high advance rates for companies in need of quick personal business loans.
Receivable financing is necessary for many small businesses to survive. Small businesses cannot afford to have a lull in cash flow when dealing with late invoice payments. Fortunately, receivable financing can provide short-term financial relief to companies in need.
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An Outsourced CEO and expert witness, Jim Thomas is the founder and president of Fitness Management USA Inc., a management consulting, turnaround, financing and brokerage firm specializing in the gym and sports industry. With more than 25 years of experience owning, operating and managing clubs of all sizes, Thomas lectures and delivers seminars, webinars and workshops across the globe on the practical skills required to successfully overcome obscurity, improve sales, build teamwork and market fitness programs and products. Visit his Web site at: www.fmconsulting.net or www.youtube.com/gymconsultant.