Improve Working Capital With Accounts Receivable Financing
Particularly in the early days of a small business, capital can be tight. A business might need to spend more money than they are making for a period of time. The usual solution would be to take out a loan, but some banks will not lend the necessary money to businesses, depending on credit scores, the projected profit and the amount needed. If this is the case for your business, consider how you can put accounts receivable financing to work.
Accounts receivable financing involves using the money that you expect to receive from a client but have not received yet. In other words, you have sent a client a bill, so you know you will receive a set amount of money, but the client has not paid it yet.
While it may be better to wait until you actually receive payment to spend the money, sometimes you do not have a choice about when you need to use capital. Your accounts receivable can help you if you can find a third party willing to accept them as collateral for a loan. Generally, the lender will not be a bank, so it’s important to make sure that the lender is someone trustworthy, such as a shareholder in your company. As with any major transaction, you should draw up a contract to ensure that all parties fully understand the terms of the agreement. Once you do receive the money from your clients, repay the lender as soon as possible to prevent yourself from staying in debt.
When used correctly, this kind of financing allows you to do more with your money. Many opportunities that arise are time-sensitive, and you may have a rigid schedule for payments from your clients. As long as you keep track of how much payment you will receive and do not borrow more than that amount of money, this system can keep you from missing out on opportunities to grow your business. You could also use this kind of financing to attract potential investors to your company. For example, if you borrow money from someone and immediately pay them back, they will trust you, think more highly of your business and be more likely to work with you in the future.
As with any borrowing of money, accounts receivable financing should not be used unless you need it. However, it is a good way for small businesses to stay operational and profitable in times of trouble.