Is Accounts Receivable Financing An Option for Your Business?

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Cash flow solutions

There is no shortage of small businesses in the United States. Currently, there about 28 million throughout the country, and Forbes estimates that 543,000 open each month. These businesses, which by definition employ fewer than 500 people, are based out of homes more often than they’re based out of offices, perhaps because so many are budget conscious. In fact, in 2011 alone, about 800,000 small businesses received business loans in the U.S. Loans can be excellent for improving cash flow or enabling businesses to make necessary, but expensive purchases.

One type of loan, accounts receivable financing, is much like the merchant cash advance in that it allows business owners to access cash immediately by selling receivables to a third part. It is sometimes called “factoring.”

Accounts Receivable Financing is Based On Size

The third party purchasing accounts receivable from the seller and collecting from the buyer would prefer to collect a few large accounts instead of several small ones. As such, there are sometimes minimum account levels for those wishing to utilize accounts receivable financing.

Accounts Receivable Financing is Based On Creditworthiness

The company will review the creditworthiness of the buyer, because that company will be putting up the money. The creditworthiness of the seller, on the other hand, is not considered. If the buyer has a good credit history and is well-established, it is more likely that accounts receivable financing will be granted.

Accounts Receivable Financing is Based On Age

It is unlikely that accounts receivable that are beyond their agreed payment dates will be paid. As such, financing companies will usually either offer discounted amounts for the accounts receivable or will not purchase them at all. After all, they aren’t collection agencies and don’t want to spend time pressing the buyer for collection.

Advantages and Disadvantages of Accounts Receivable Financing


Companies offering payment terms often do so because their competitors do, though it will often put them in troublesome positions as they can’t afford to wait up to three months for money. The same troubles occur for companies that sell seasonably. Accounts receivable financing can offer payment soon after a sale is made.


Some factoring companies will directly notify buyers that they own the accounts receivable and that payment must be sent to them directly. Factoring is quite expensive, and the accounts are sold at a discount that cuts into the seller’s profit margin. For example, a $20,000 accounts receivable may only be factored for $18,000.

It might not be for everybody, but accounts receivable financing can be just the thing to get some small businesses out of a jam. Talk to a factoring company today if you think you might qualify. References.

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