As small business owners continue to operate their business, it’s important to have access to liquidity whereby you can optimize your working capital to ensure positive cash flow. Managing cash flow has been one of the biggest challenges for business owners. That’s why it’s important to have a backup plan to ensure that you can both free up extra funds when needed as well as gain access to cash quickly.
One of the ways to do so is by selling outstanding accounts receivables that will be sitting on the books for another 30, 60 or 90 days. Since most business owners need their money today, the outstanding accounts receivables is not solving the current cash problems that they’re being faced with today. So how do they solve this problem so they can get cash in their hands right away? Two of the most popular solutions consist of factoring and accounts receivable financing, also referred to as A/R financing. If this is of interest to you, more information is provided below that explains the differences between the two.
Factoring involves a lender taking over the collection of outstanding accounts receivable invoices. This happens when lenders enter into a wholesale agreement, which means that the business owner is required to sell its overall accounts receivable ledger at a huge discount. In most cases, the accounts receivable balance is purchased for a fee of roughly 80%. The additional fees in annual interest alone are often more than 30%.
Factoring is also limited to companies that have customers within the US and not offered on a global basis.
Accounts Receivable Financing
Accounts Receivable Financing is different from factoring in that it allows companies the opportunity to receive a 100% advancement against their outstanding receivables. Since accounts receivable finance is structured as a non-recourse solution, it results in an off-balance-sheet treatment. In addition to that, the financing rates are exceptionally lower than the rates associated with traditional factoring – sometimes as much as 10 times lower.
Also, the invoices involved in accounts receivable finances are based on approved invoices only as opposed to the entire outstanding accounts receivable account.
Need more information about the best solution for you? Then please contact Prime Wealth Development to learn more today.