Accounts receivable financing lets businesses receive early payments on outstanding invoices. Businesses that use accounts receivable financing will commit some or all their outstanding invoices to a lender or funder to receive early payment. All this is done for a small fee.
There are several types of accounts receivable financing options to choose from. Keep reading to learn what these are.
Asset Based Lending
This is also called a business line of credit or a traditional commercial loan. With asset-based lending, you will incur significant fees, so make sure to consider carefully if this is the best option. You must also commit most of your receivables to this loan option, and there is limited flexibility regarding what receivables to commit.
Factoring is not the same thing as reverse factoring. You sell your accounts receivable to a funder with factoring, but the initial payment is for less than the full amount of the receivable.
For example, your business could receive a payment for 80% of the total invoice amount, minus the fees, early. Compared to ABL (mentioned above), businesses have more flexibility to choose what receivables to trade; however, the funder fees may be high, and the credit lines could be smaller. However, similar to ABL, factored receivables are recorded on your business’s balance sheet as an outstanding debt.
Selective Receivables Finance
With selective accounts receivable financing, your business can choose what receivables to advance and receive early payment for. With selective receivables finance, your business can secure the advanced payment for the total amount of every receivable.
Usually, the financing rates for selective receivables finance are much lower than the other options listed here. This method may not count as debt because of the program’s structure. Since selective receivables finance will not be listed on your balance sheet, it will not impact your debt ratios or your other outstanding lines of credit.
Using Accounts Receivable Financing for Your Business
As you can see, there are several options to consider if you want to utilize accounts receivable financing. It is up to you to determine what option is right for your needs and business. Having the needed capital can help ensure your business continues to operate and run correctly and that you do not encounter issues related to the capital you have to work with. Being informed and knowing what options you have will help you find one that works for your business.