While Accounts Receivable Financing may sound intriguing, some people may have misgivings about what it is and what it is not. Here are five misconceptions explained that can help determine if AR Financing is a solution for enabling business.
Here are five accounts receivable financing misconceptions explained that can help determine if AR Financing is a solution for enabling business.
While factoring may have previously been associated with large businesses, things have changed.
In recent years, it has gotten exponentially harder for small to middle market businesses and start-ups to gain capital from traditional avenues. This is because banks are more and more hesitant to loan cash to companies who have little to no history.
Because of this, these businesses are often faced with the difficulty of finding additional cash to fund their companies—even when business is booming. Luckily, accounts receivable financing is fast and reliable, making it a perfect alternative to small to middle market businesses looking for financing.
Many people believe that if a company is using AR financing, that it is in financial turmoil.
Yet on the contrary, factoring of accounts receivables is most often used as a source of funding for upcoming and rapidly growing businesses. Most often, a small to middle market company will invest in factoring when faced with an unexpected boom in business, causing them to need additional working capital to continue with the high demand.
Many businesses with low credit scores find it difficult to qualify for bank loans and credit cards. This leaves them with few options when it comes to securing financing—this is, other than accounts receivable lending.
Businesses with little to no credit are great candidates for AR financing due to the fact that while factors do look at a businesses credit score, they are not as critical as banks as they are more interested in the creditworthiness of the client’s customers.
Applying for a bank loan or line of credit is known to be a lengthy and complicated process. And if approved, it can take months to receive capital from the bank.
Receivables funding is quite different. After being approved, which is a short process in itself, a business will most likely receive cash within the next few days—or even next day in some cases.
In reality, the cost of AR Financing is extremely competitive among other financing options. This includes most traditional loans, which come with high interest and additional fees. Overall, those who utilize factoring to cut cash flow shortages will be in a better financial state, leaving room for them to save money and prosper as a company.