A generous credit policy sounds pretty great, right? This generally allows you to bring in more customers, because it means they don’t have to spend as much money at once and thus feel more comfortable interacting with you and your company.
Allowing people to pay in part may sound friendly and even financially sound. Even if you have faith in your customers, do you really know exactly when you’ll get the funds to you?
When you allow your customers to use credit, they sometimes take a lot longer than you’d like to get the money back to you. And what do you do in the meantime? You use more funds to pay for your normal daily expenditures without getting more to fill your company’s piggy bank.
Outstanding invoices mean less liquidity while you wait for weeks or even months for your customers to come back and pay off their debt to you.
If you were to own a car shop, for example, and you allow customers to get repairs and replacements through a credit policy, then you might find yourself draining your funds on parts purchases without getting the money to fund future purchases. You just end up spending more money on labor and on parts, while more people come in and order labor and parts.
Even if your customers pay you back within normal time limits for their invoices, you’re still out that money until they come back in. If they’re not late, you can’t blame them—personally or legally—for paying you just before the last minute. If you agree to a payment schedule, it’s not their fault for following what you agreed upon, even if you later realize that it wasn’t the best choice.
Fewer funds mean you can’t expand your business, and you may have difficulties buying more inventory or providing services to your customers. So what do you do when you need money that you just can’t get? Take out a loan? No one likes debts, and no one likes having to pay interest on loans that you ordinarily wouldn’t have needed in the first place. And loans are getting harder and harder to get. Banks all over the country are changing their loan practices to make it more and more difficult to get a loan, especially if you’re a small, emerging business.
Accounts receivable are invoices that will be paid in 30-90 days can be assets for lenders and third-party companies. It can turn into cash more quickly than waiting for your customers to pay you for your products and/or services.
What Are You Supposed To Do?
An accounts receivable line of credit lets both you and your customers make the most of a credit system. Rather than letting those invoices collect dust, you sell your accounts receivable to a third party (called a “factor”). With only a small fee, your invoices get paid in advance. Accounts receivable lenders provide your company with more liquidity so you don’t get stuck bleeding out cash while you wait for your customers to come back to pay you.
Loans on accounts receivable allow you to get immediate money so you can make repairs, expand your business, attend to payroll, or take advantage of new opportunities as they come.
Instead of selling your current assets to pay for important purchases or taking out a full loan, you can start up an accounts receivable line of credit.
Low accounts receivables factoring rates allow you to spend a small amount of money in order to get the benefits of your customers’ invoices without the long wait.
Average factoring rates depend upon two important things: if your business is a B2B (business to business) or B2G (business to government) business and if your invoices/accounts receivable must be due or payable within 90 days. The quality of your financial statements and how long your company has been in operation are other components to how well your factoring will work for you.
While bank loans are complicated and difficult to get, getting an accounts receivable line of credit means no business liability, no debt, no credit limit, and no interest!
Factoring your accounts receivable lets your company get a funding boost while you wait for your customers to pay you back. An accounts receivable line of credit is instead a type of loan where your accounts receivable are treated as collateral, rather than just invoices just lying around waiting to be paid for.
When you’re starting out with your company, cash flow can be a real problem. Securing your finances through your accounts receivable can solve those issues around that valuable cash flow. Financial solutions don’t come around so easily, but factoring and accounts receivable lines of credits are two of your best options if your company is still fresh in its market.
You can use your accounts receivable as collateral for options like accounts receivable factoring, asset-based loans, and commercial lines of credit. More mature companies are able to do regular lines of credit, but small and mid-sized companies can use asset-based loans and factoring.
Selling your accounts receivable allows you to receive a lot of money while your customer gets their money together to pay you. You get part of the cash right away from a third party, and once the customer fulfills the invoice, you get the remaining money, outside of a small financing fee. Using a lot of invoices in your company can be aided with factoring, especially as your sales increase.
To learn more about accounts receivable lines of credits, please contact us today!