According to a study done by the University of Tennessee, 25% of startups fail within the first year. Of those, 46% fail due to incompetence, be it poor market research, failure to budget, or a lack of financing knowledge. It is this last pitfall that we need to examine. Too many bright entrepreneurs find themselves forced to shutter the doors due to a lack of cash flow in the early stages of their company. Already relying on investor capital, these business owners can’t find a way to pay their employees and vendors while waiting on clients to come through on their bills. Accounts receivable financing can provide a life preserver.
What is accounts receivable financing? It is as simple as it is effective. Using your unpaid invoices as collateral, you can enter into a financing agreement with a company that specializes in this type of loan. More often than not, you can set up a loan for the full amount that your clients owe, though the age of the invoices will come into play. An older receivables account isn’t going to be worth as much as a newer one.
Points to Remember
- This system gives you a line of credit against the receivables you are owed.
- It is a method of getting fast cash at a remarkable rate of value (north of 80% of invoice value).
- You retain greater control over collections, unlike selling the invoice outright.
- Credit isn’t an issue, though a strong accounts receivable department is.
Advantages to the Business Owner
Let’s face it, there are few aspects of running a business more important than having a healthy cash flow. When your capital is stammered, hiring new employees, marketing, and product development becomes impossible. By using accounts receivable financing, you are able to free up extra capital and continue investing in the growth of your business. And unlike finding additional investors, you won’t have to give away pieces of your company. Here are some of the other invaluable benefits of this money management tool:
Insignificant Debt Accumulation: This is what kills many new businesses. Government loans are great and bank loans are easy to get, but all of that debt adds up. You don’t want to find yourself in a situation where you have to choose between paying the light bill and paying the bank.
No Credit Barriers: For entrepreneurs who have managed to keep their credit record clean, this isn’t a significant advantage, but it certainly is for those who have a ding or two in their Experian report.
No Restriction on Capital: When you appeal to an investor, there may be strings attached to that money. You didn’t start your own business to have someone else dictate to you how to run it.
The Final Word
Accounts receivable financing is not the only good way to raise money for your business, of course. Bootstrapping, corporate credit cards, and convertible debt deals all have their place in a company struggling financially. That said, if you have a strong A/R department, a history of paying clients, and you need money fast, there are few better tools at your disposal.