Accounts Receivable Financing: The “No-Debt” Approach to Grow Your Business
There are very few practical ways for businesses to grow without debt. For many years, debt was the method recommended most for business expansion. This approach to commercial financing is almost no longer an option for small to medium businesses. With banks holding on to their money tighter then ever, it is becoming nearly impossible for businesses to get the capital they need to grow. This inability to receive money via bank loans has gone beyond feelings of frustration to ones of desperation. Companies are forced to remain stagnant even in industries with the potential for growth exists because no one will lend them any money. What many of these companies do not know is that there is a way to secure capital that doesn’t require that they use debt or apply for a bank loan. This type of factoring arrangement is called accounts receivable financing.
Accounts receivables financing is a simple and fast way for companies to raise capital. Perhaps the best biggest advantage is that it can be done without taking on any new debt. The process works like this. A business, known as a Factor, purchases the invoices of companies that wish to sell them. They do so at a discounted rate, typically for between 70% and 90% of the total value of the invoice. This money is paid upfront. They then act as a collection agency of sorts and will collect, the money owed by the customer. This might involve them sending letters and making phone calls if necessary. All of the original payment arrangements will remain the same. After they (the Factor) has received the payment due, they will give the money back to the company they purchased the invoice from, minus their payment amount and fees.
This is an excellent way for companies to grow their businesses with “no debt.” Instead of borrowing money, they are leveraging the invoices of the customers they already have. Rather than a company wait the standard 30 to 60 days to receive the money owed to them, they can obtain working capital in as little as 24 hours. This can mean a lot to a business that is cash poor. This is especially true in today’s economy. When every dollar is often needed to keep the doors open, it can be difficult waiting for months at a time to receive monies that a company requires today to keep operating
For a company to take advantage of accounts receivable financing, they need to have customers with very good credit. This is even more important then their own credit history (which the Factor will not be concerned with). The Factor has to feel confident that they will be able to collect the money that they paid out for the invoices. Without customers with good credit, a business will not be able to utilize receivable financing as an option. For these companies, unfortunately, it may be necessary to take on business debt via bank loans.