Entrepreneurs are being challenged when starting a new business, especially in financing. Some of them are most financially challenged, while others are on the confidence aspect. Securing funds ensures that a new business keeps things running smoothly.

Traditional loans and investments are often the usual options to finance a new business, while account receivables financing is an often-overlooked solution. The accounts and receivables can provide the cash flow and financing needed for a starting business to grow.

Yes, accounts receivable financing can finance a new business. It is where a business sells its outstanding invoices to a third party in exchange for instant cash.

Accounts receivables financing

Accounts receivable financing is short-term funding for a business using its receivables. Account receivable financing takes different forms and the three major types are:

• Accounts receivable loans
• Asset-backed securities
• Factoring

Accounts receivable financing is for businesses turning unpaid customer invoices into cash. While waiting weeks or months for customers’ payment, companies can sell their invoices to a third-party company in exchange for funds or immediate cash. The approach can be useful for businesses operating a B2B or Business-to-Business model where extended payment terms are common. Businesses can access the working capital, instead of struggling with delayed payments.

Accounts receivable loans

Accounts and receivable loans are the best source of short-term funding. The borrower can use their accounts receivables for the collateral to be raised to the bank. The bank lends a portion like 80% of the original value of the receivables.

Sometimes, the fraction varies according to the quality of the receivables. If the accounts receivable has better quality, then it has a higher fraction.

What are the terms of accounts receivable loans?

The terms of accounts receivable loans clarify that a borrower still owns the receivables and is responsible for the collection of debts. A business with a good relationship with the debtors and can surely get payments are only eligible for AR loans. The terms stated here are to inform potential borrowers eligible for the AR loan can apply now.

Asset-backed securities

Asset-backed securities are a financing option for larger companies. It is a fixed-income tool that creates coupon payments for investors to emanate cash flows from underlying assets. A big company can secure some or all the receivables in an SPV. Special Purpose Vehicle is the tool used for:

• holding the receivables
• collecting payments
• passes to the investors

The borrowing company is getting the money from investors through SPV.

Factoring

Factoring is the common accounts receivable financing for small businesses. The borrower sells its receivables to the factoring organization. The receivables will be sold at a discounted amount. The discounts will be based on the quality of the receivables.

The borrower has no responsibility and is no longer connected to the collection process since it is an outright sale of receivables. The borrower is no longer the owner of the receivable, the ownership is transferred to the factoring organization. Factoring can be costly as it involves various fees along with the interest expense.

When a business wishes to maintain good relationships with the debtors.

Factors that can affect the quality of receivables

The quality of receivables makes you whether you are eligible for accounts receivables financing:

• Creditworthiness of the debtor
• Duration of receivables
• Industry of the original account
• Quality of documentation

Conclusion

Accounts receivable financing can save you from financial issues and give you an instant solution, which is what every business is looking for. Prove your credibility as a borrower to have a smooth accounts receivable financing application.

Accounts receivable financing is the solution for a wider effective capital management strategy.