As per reports, around 48% customer payments are late, which is a major reasons why businesses end up in financial troubles. The problem is seen not in just one industry but throughout the corporate sector all around the world.
Late payments put pressure on businesses as a result businesses end up in trouble. A way to solve this problem is to chase customers and procure the payment which is due. But this is not a very good option as this may take a lot of time and effort and may not be a suitable option for a business that is already dealing with cash flow problems. There is a better option, account receivables financing.
Let’s find out more about account receivables financing and how it can help a business meet its financial needs.
What Is Account Receivables Financing?
Account receivables are invoices (money) owed by customers to a business. While businesses can chase customers and get money they’re owed, it is usually a time consuming process, and hence not a very good option.
This is why many businesses prefer to sell account receivables to other businesses or companies in exchange for money.
Account receivables financing offers an option to a business to get instantly paid for all the outstanding money they are owed. They only have to pay a small fee and interest rate in return. The fee can range from 0.30% to 2.5% per invoice and the interest rate typically varies between 8% – 30%.
Around 85% of total invoices amount is paid initially and the remaining 15% is used by the lending company to take out their processing fee and the remaining is paid later on after all invoices are cleared.
It should be mentioned that the charges and interest depend on your lender. Some companies have low rates while some companies have very high rates.
You must shop around before finalizing a deal so that you do not have to pay a lot in the name of interest and other charges.
Who Can Qualify For Accounts Receivable Financing?
Businesses need to be at least six months old with an annual revenue of about $50,000 to qualify for such a loan.
Credit score also plays an important role in selling your accounts receivable to a factoring company.
Credit score shows how a business has dealt with debt money in the past along with other payment history. This helps the lending company judge if a business will be able to pay the interest and per invoice fee on time or not.
Normally, 550+ of credit score is needed to be able to get your request approved. However, you must make sure to keep your credit score as high as possible so that the risk of rejection is low.
Benefits Of Accounts Receivable Financing
The first and most important benefit is to get instant cash in hand in just a day or two if you get qualified.
Delayed payments often cause cash flow issues which can account for many problems in a business. Opting for account receivables financing helps to improve cash flow by borrowing from a company in exchange for the invoices a business owes.
Since a business uses its own invoices as collateral, it is safer than other kinds of loans where property or assets are put as collateral. You do not risk losing your property in such financing. However, if you are not comfortable with this type of loan, you may consider unsecured loans. Many companies provide immediate cash to businesses without any collateral. You just need to shop around.
Most business finance companies will require a minimum qualifying criteria for any unsecured business loan. According to Unsecuredbusinessloans.com.au “your business should be trading for at least 6 months and have minimum turnover/sales of $5000 per month – although this is only a general rule”.
It is important to keep tabs on the account receivables as they can pile on and disrupt the cash flow of a business. However, if you are in real need, you may use these invoices to get a loan.