Accounts Receivable Financing and Your Small Business

By: Kris Koonar

Small businesses often need a working capital to take their business ahead to further growth. Sales and profit margins, though relevant, are secondary to cash in hand. The availability of funds to meet regular expenses, like rents, wages, maintenance, loan repayments and so on, are of great relevance. The cash flow is a major concern area for small businesses. The utility of accounts receivable finance as an option, to achieve more stability in the cash condition and smooth functioning of their business is fast gaining popularity.

Small companies often find themselves in tricky situations where they often have to forgo larger business opportunities because they do not have working capital in hand. This is because they have slow paying customers who pay after a period of 30 to 60 days. Accounts receivable finance is a loan given by financial institutions against the assets of small business, the accounts receivables. As the business is small they do not have as much years of experience as required by banks.

Moreover they may not have as many assets to offer banks as collateral. This affects their chances of getting a bank loan. And even if they do get the loan; it becomes a very lengthy process, besides a loan is a one time thing. If customers pay regularly then the repayment becomes easier. Accounts receivable finance is such that, the finance is available within a period of 48 hours on submission of invoices.

The financial institutions have only one major criterion in providing finance, the credit worthy customer. Some finance companies provide finance even if you do not have anything else as collateral, but have good invoices, with good profit margins and a great business plan. As small businesses get finances easily on a timely basis they have the chance to take up a new business opportunity with good returns in future. If fast paying customer invoices are used, cash can be availed of immediately when required.

As business grows the small business has more invoices available to provide as collateral for such accounts receivable financing. So the business can get loans as and when they require through the year. At the end of the year there is no debt left. As business grows fixed costs do not increase much. Cost of production is instead reduced with higher volumes of production. This leads to higher profit margins and better business growth.

Another advantage that accounts receivable financing brings in for small business, is the guidance they provide in selection of customers. The creditworthiness of the customer is the most important thing. These organizations help the small business select customers with good track records and credit ratings. Moreover as the loan repayment has to be done at a given time the small businesses find themselves bringing about more discipline in managing business accounts. As loan repayment is within a short period it does not affect your balance sheet adversely. Rather with regular payments your creditworthiness is displayed.

Accounts receivable finance proves to be a good resource for financing the business needs of small businesses. A timely finance is a major booster for their businesses to grow.

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