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 o