Understanding Accounts Receivable Financing and How It Can Help Your Business
For business owners, finding ways to finance their growing companies can feel overwhelming. Traditional business loans are always an option, but they increase your overall debt and can hurt your company’s credit score. Luckily, there are alternative ways to get the money you need when you need it. Accounts receivable (AR) financing is one of the most popular options, but before you can decide if it’s right for you, you need to understand how it works.
How AR Financing Works
AR financing allows you to leverage the outstanding invoices your business has to get money immediately. You essentially sell those outstanding invoices to a lender who gives you the money upfront. When your client pays you, you repay the lender for the amount of the invoice plus any interest accrued.
The terms of the financing option will be set by the lender, but you’re free and encouraged to negotiate with them. If you’re careful, you may be able to get interest rates and terms that are more favorable than the ones you’d receive from a traditional lender.
The Pros of AR Financing
Unlike traditional loans, you won’t have to worry about listing any collateral to get the money you need. This means your business and your equipment are safe and can’t be seized by the lender to settle your debts. Even better, your personal finances will be safe and kept separate from your business without issue.
You’ll also be able to avoid the hassle of having to take on investors or business partners. You’ll keep your company’s original structure intact and won’t have to give up ownership just to get the money you need.
The Cons of AR Financing
Though accounts receivable financing is flexible, lenders tend to stick you with strict contracts. Those contracts can lock you into a longer-term financing option than you’d like, forcing your business to pay higher interest rates for longer than seems fair. That said, you can negotiate the contract before you agree to any terms. Just remember to be picky when speaking with lenders and you should be okay.
AR financing companies often assess higher interest rates than traditional small business loan providers. Before you agree to any financing option, take the time to review the terms of your agreement. If anything seems out of the ordinary or the company asks for terms you disagree with, walk away.
Accounts receivable financing is a great choice for small business owners looking to get funding quickly. Just do your due diligence and make sure the terms work for your needs.