Though 30% of Americans think the economy is doing fine, we’re currently in one of the worst economic crises of our lifetime.
While the economy has gone up and down, one thing that has often remained the standard is business owners looking for ways to bring more cash to their business.
It’s nothing new that entrepreneurs and small business owners often turn to other people in hopes that they can use their money to help their business. This is where accounts receivable funding comes in.
This funding is a tool that helps businesses avoid cash problems by providing them with the necessary resources to grow as a business.
What is accounts receivable funding though? Continue reading to learn not only what it is but also the advantages and disadvantages that come along with it.
What Is Accounts Receivable Funding?
The basics of accounts receivable funding are that it is a type of financial arrangement that allows small businesses to receive capital or funding for their business. These arrangements are structured in several ways, but most often either as a loan or an asset sale.
In other words, this is a line of credit that turns your account receivables into immediate cash. Account receivables are the outstanding balances of invoices that have been billed to customers but not paid yet.
How does this funding work, you ask? An accounts receivable company will advance a lump sum of money to a company based on the money that the company is owed for services completed.
The accounts receivable company will charge a fee to do this, typically between one and five percent, which is based on the amount of money given as well as the company’s sales volume.
This can be a lot of information to take in, so for a better understanding make sure you’re fully doing your research.
Pros of Accounts Receivable Funding
There are many accounts receivable funding pros and cons, so for someone unfamiliar with how it all works, it may be hard to tell whether this type of funding is worth it.
Here are some of the pros:
- Quick approvals so quick funding
- Easy application process
- Not a lot of paperwork involved
- Frees up working capital
- No long-term contracts
- Flexibility with lump sum amount
- Flexibility with the length of time
- Takes the burden off accounts receivable department
Cons of Accounts Receivable Funding
There are advantages and disadvantages of accounts receivable funding, and while there are several pros, this funding has also carried a negative connotation as well.
Here are some of the cons:
- Can cost more than financing through traditional lenders
- Interest on the advance may be high
- Fees are taken out
- Might have to give up control over certain business processes
- Customers failure to pay becomes your burden
- Can place stress on business relationships
Support for Businesses
While accounts receivable funding is a common thing in the business world, that doesn’t automatically mean it’s the right step to take for your company.
You now know the basics of what it is as well as the pros and cons that come along with it, so make sure you think it over fully before delving into it for your business.
If you liked this article head over to our website where you’ll find even more information on business funding.