When you run a business with credit customers, then you realize that issuing credit invoices and waiting for 30, 60 or 90 days for your payments to arrive can drain you emotionally as well as financially. In such a case you can turn to accounts receivable financing to free your locked money.
If cash flow is a problem, then you could turn to banks for a loan. But that would require arranging for collateral. You would only get a fixed amount for a fixed term as a loan and you would still be required to pay interest on that loan. A faster and easier way would be to go in for accounts receivable financing. In this arrangement, an accounts receivable financing company will 'buy' all your credit invoices, i.e. your receivables. They will then pay you either 90% to 95% of the invoice value within 1 to 2 days and the balance less their charges, when they receive the payment from your customer on the due date, or they might just pay you the entire amount of the invoices less their charges.
This will depend on the credit rating of your customers as decided by the financing company, the credit period, which you have provided to your customers and the total volume of business that you will provide your financing company. One instant advantage of this system is that your cash flow will improve overnight. You can now use that money to pay off staff salaries, build up inventory and expand your business. You can now also try to get larger orders, which would not have been possible earlier due to cash constraints.
Another major benefit is that these companies will take over collection of payments from your customers. You can now divert your collection staff to some other department. Your mind will also be free from the daily worries of contacting your customers to ask for payments. The accounts receivable financing company will now handle the entire process. However, care should be taken to ensure that the finance company has courteous and tactful staff to deal with your customers, since it is your reputation on the line.
The finance company will be able to provide you with updated reports on the receivables status of your customers and you can now keep an eye on your receivables without getting involved directly in the collection process. You too, can now concentrate on increasing sales rather than getting tied up in running after collections. The biggest advantage in such a system is that the receivables amount grows along with your business. So, the larger the value of your credit invoices, the larger the amount you will receive within a day or two. The finance company will charge 1.5% to 4% per month on your receivables. So, you should first ensure whether these charges could be absorbed without burning a hole in your pocket. If they can, then this system of finance could be ideal to propel your business to greater heights.
So, crosscheck the charges of the finance company and their quality of service before making up your mind to tie up with any one of them. An accounts receivable financing company can become an extension of your business if you get hold of the right finance company.
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