When a business goes through a slow period like a seasonal downturn, cash flow can become a problem, making it difficult to meet the business’s financial obligations. Customers who are slow to settle their invoices can add to this pain. However, one possible solution exists in the form of accounts receivable financing (which is also called invoice financing).

How It Works

Accounts receivable financing is a fairly simple process that relies on a business having outstanding invoices, which are essentially bills for goods or services that customers have yet to pay. Those make up the accounts receivable. The process works by having the business sell its accounts receivable to a lender in exchange for an immediate payment of cash that reflects the value of the sold accounts, minus fees.

At The Balance SMB, Marco Carbajo explains that accounts receivable financing agreements can differ from one another in numerous ways. For instance, they can vary greatly in length. Some agreements also have full recourse clauses, which are provisions that allow the lender to “force the business to pay any invoices” that cannot be collected after a certain amount of time. These conditions are important for a business to be aware of.

The Upside

Businesses need to be on top of the details before signing an invoice financing agreement. However, for businesses that choose the right one, the benefits can be numerous:

• Invoice financing can provide a quick injection of cash, making it a more nimble funding option than alternatives like bank loans. 
• Invoice financing can also be easier to obtain than other options. 
• Collateral is typically not needed.  

Making the Most of the Financing

As with any funding setup, some basic planning can help your business make the most of accounts receivable financing. For instance, if your company routinely struggles at a certain time of year, it may be worth setting aside heftier reserves of cash during more successful months or looking for ways to increase your revenue during typically lean months. 

Want to keep learning about how different funding options work? Just check out Increase Lending’s other blog posts.