Financing Receivables and Using Vendor Financing to Improve Your Business Cash Flow
Receivable financing is an interesting alternative to traditional bank financing. Receivable financing involves obtaining a loan or financing by leveraging your company’s accounts receivables.
There are a couple of ways it works. If you have a group of customers who owe your money, you can use those accounts as collateral to obtain a loan from a company that does receivable financing. Then, when the customers pay their bills, you can pay off your loan.
You could also sell those accounts to a factoring company. The company would buy your invoices and pay you a percentage of what the customers owe upfront. The factoring company would then collect on the customers’ accounts. When the accounts receivable were paid, the factoring company would keep a small fee and pay you the balance.
Receivable financing is a good option for a company that has revenue in the pipeline but needs money quickly to pay its bills. It’s also a good option for companies that just don’t want to be in the business of collecting outstanding bills and are happy to pay a small fee in exchange for receiving some of the money upfront.
Pro and Cons of Financing Receivables
Accounts Receivable Financing Pros:
- You get money upfront for accounts that have not yet paid
- It may be less expensive than loans or lines of credit
- Can take away the burden of collecting unpaid bills
Receivable Financing Cons:
- You need to have unpaid receivables to access receivable financing
- Terms of unpaid accounts need to be carefully recorded and maintained
Vendor financing is when a company you will buy goods or services from helps you finance the business. This type of financing is more common when there is a large purchase of equipment, inventory, or real estate involved. For example, if you need to buy IT equipment, such as computers and servers, the IT vendor may give you the equipment in exchange for a loan rather than cash. In that scenario, you’d pay for the equipment in payments rather than upfront.
In real estate, property owners and developers will sometimes sell real estate in exchange for partial ownership of the business rather than cash. In this scenario, you’d buy a piece of land or a building and the seller would become a partial owner of your business. It doesn’t cost you anything out of pocket, but it does cost you a portion of your ownership.
Vendor financing should be considered when you have to purchase a sizable amount of hard goods. If you’re purchasing inventory for a store, computer equipment, vehicles, or other machinery, you may want to negotiate financing deals with your vendors. That will alleviate the cash crunch and allow you to build your business as you pay for the equipment.
Pros and Cons of Vendor Financing
Vendor Financing Pros:
- Allows you to buy equipment without paying upfront
- Preserves cash for emergencies
Vendor Financing Cons:
- Payments may be made for a long period of time
- Equipment can be taken back if you don’t keep up with payments