One of the most common cash flow fixes for small and large businesses alike is financing or factoring their accounts receivable. Because the loan can be used as a de facto revolver, businesses with long lead times or high seasonality often finance their debtor book to stabilize their cash position
Accounts receivable financing companies will only make a loan against the receivables if they feel comfortable that it is going to be paid. To conduct research on the account, they may look to see the credit score of the company this is supposed to pay, they will want to see an aging summary to see how much is owed and how overdue it is.
If the lenders decide that the account is worth financing, they will lend up to 80% of the receivable balance at only a few points of interest. Because these loans traditionally don’t take very long to close and because the interest is very affordable compared to other options, they are a favorite for companies with cash flow headaches.
Because there is a relatively short decision period, accounts receivable loans are popular with business owners who need capital quickly. Qualified businesses with well known clients can secure capital within three weeks in some cases.
For those interested in funding their accounts receivables, start by completing this contact form and telling us a bit about your situation. We have relationships with all of the reputable acquisition financing companies and can place your deal with one that is a fit.
Industries that can utilize accounts receivable financing are typically those that have residual clientele. Either the business can have master service agreements in place such as many oil & gas service businesses do. Or, they could have month to month contracts with the same clientele for a number of years. Lenders like both of these situations because they have a higher degree of certainty that the customer will end up paying.
When you look to get quick capital by using your receivables as collateral, you are confronted with two choices. Do you want to factor the receivables or finance them. Factoring your receivables means that you are selling them to a factoring company and they pay you cash for them at close. They will almost certainly call the clients to verify their debts, which you may not want since you plan on keeping these people as clients.
The second option is receivables financing. With accounts receivable financing you are not selling the debt obligation, you are simply using it as collateral for the loan. This means, you will still have to collect the money from the clients and pay down the debt and the financing company more than likely won’t be calling your clients.
Accounts receivable factoring/ financing may be the right option for you, however, there are many other ways to put capital into your business that you should potentially look into.
In addition to getting an outside investor, you may want to look into utilizing our commercial loan broker service to get capital for you business. In short, we shop your unique situation around to a number of private lenders until we find the right loan option for you. This means banks, private debt companies, family offices and more. In addition, it is worthwhile for you to read up on asset based lenders and business acquisition lenders.