Even the best budget is not foolproof, and business owners often find themselves needing a little more capital to sustain their operations until the next round of payments comes in. Frequently, businesses turn to loans to solve this problem, but small and new businesses often struggle to receive approval for traditional loans. Another option is accounts receivable financing or factoring, which is when a business sells clients’ invoices to a different company. The other company, called the factor, gives the original business a percentage of the invoices immediately. When the clients’ payment arrives, their money goes directly to the factor. While the factor does keep a percentage of the invoices’ value, factoring has many advantages for companies that need capital.
You Receive the Money in Advance
Sometimes, businesses need money earlier than when they are scheduled to receive clients’ payments. In other situations, clients do not pay their invoices on time, so businesses do not have the money that they need for bills, payroll or supplies. Factoring provides the benefit of early access to this capital, minus a percentage for the factor’s assistance.
Your Credit Score Is Unaffected
Maintaining or improving credit scores is high on new business owners’ priority lists. Until they have improved their credit scores, they struggle to meet requirements for loans, which are necessary for larger projects. One of the main advantages of factoring is that it does not affect businesses’ credit histories since it is not a loan or a form of credit. While accounts receivable financing does not improve credit scores because it does not prove that businesses can be trusted with credit, it also does not worsen them. Business owners do not have to fear rejection for future financial applications if clients are late on their payments to the factor.
Your Budget Is Maintained
While business owners have to adjust their budgets slightly when they receive money through factoring, the process should not cause major budgeting problems. After all, the business was already supposed to receive this money; it simply came earlier than was planned. They also do not have to create room in their budgets for interest. The factor receives a portion of the profit, but this share is automatically deducted, and the company will not be billed every month.
Accounts receivable financing allows business owners to access the capital they need to keep their companies open without turning to loans or other alternative financing sources.