Every startup and small business out there all face similar challenges when it comes to maintaining good cash flow and financing their business. They need to balance both if they want their company to thrive and not end up being in too much debt. But what if you have a lot of accounts receivables (AR) and struggle to maintain a steady cash flow for your business? This is where AR financing, commonly known as invoice factoring, comes in handy. Let’s explore what factoring is and how it can help your business operations.
What Is Accounts Receivable Financing?
Accounts receivable financing is a means of short-term funding that a business can draw on using its receivables. It’s basically a way to receive early payment on your outstanding invoices. If you happen to have a mismatch between your business’s cash inflows and outflows, AR financing can help you get some quick cash on hand and not depend too much on when your customers will pay you.
A good sample scenario of AR financing is a water company that bills its clients after they receive their water. Suppose the water company happens to need some working capital boost while waiting for clients to pay. In that case, AR finance will enable them to borrow money against the value of their accounts receivable or just a portion of it. This would allow the company to have the cash on hand and use it. They will then settle their accounts with external financiers called factoring companies and pay the “loan” once they’ve received payment from their clients.
Benefits of AR Financing
AR financing can take various forms, but they all serve the same purpose: to curb cash flow shortages and give small businesses additional financing to grow their businesses. Let’s look at these benefits one by one.
- Quicker Cash Flow – The most obvious benefit of this type of financing is it can facilitate fast cash flow. AR financing allows you to make full use of all of your assets (current and owed) whenever you want.
- Fewer Distractions – Everyone knows that waiting for your customers to pay can be a nerve-wracking and sometimes stressful process. AR financing takes the pressure off needing to chase invoices for prompt payment. It somehow offsets the risk of clients not paying on time to the factoring company. That means you can focus more on maximizing the use of your working capital.
- Cheaper Than Other Alternatives – This is a much more user-friendly approach than alternating working capital management methods. Compared to a bank loan, this is a much more flexible, cheaper, and quicker approach.
AR Financing as Part of a Working Capital Strategy
Using AR financing for your business is just another tool added to your arsenal of working capital management strategies. As a business owner, you must have several options available to ensure that your working capital is managed well and is never depleted. Combined with dynamic discounting and other supply chain financing options, you’ll have a formidable set of tools to help you ensure the growth of your business.
As much as we’d like them to, invoices aren’t always paid on time, and that can easily put a strain on your cash flow. AR financing gives you the option to take out an advance based on those unpaid invoices. If you want to maintain a more steady cash flow for your business, AR financing is an excellent option for you.
Porter Capital offers working capital solutions to businesses all over the country. We work with companies from various industries through invoice factoring and asset-based lending. Our flexible financing solutions are exactly what every small business needs to get their company working like clockwork. Apply now for our working capital solutions to get a free quote.