Pros and Cons of Opting For Accounts Receivable Finance

Posted by maryparker on October 24th, 2012

Imagine a situation where your business is strapped for cash and you don’t want to go through the hassle of obtaining a business loan. The truth is that not every company that is experiencing a shortage of cash would need a small business loan. While, you may be expecting several large clients to pay their pending invoices by the end of the week or month but when you really need instant cash the right solution would be invoice finance, which is also known as accounts receivable finance. This solution would provide you with the money that you require for tackling emergencies which demands money.

Accounts receivable financing is a process of obtaining accounts receivable finance or invoice finance for one’s business. Depending on the nature of one’s business and the industry, this kind of solution may or may not be the right solution for you. This is because this financing solution comes with its set of pros and cons. Therefore, it would be advisable to weigh out its advantages and disadvantages before making a final decision. It is true, however, that some businesses or companies benefit more from this financing solution in comparison to the others.

One of the advantages experienced by those going for accounts receivable finance is that this kind of solution provides them with opportunities for financial advances. Industries that experience difficulties in receiving funding through traditional methods would usually find invoice finance to be an apt solution for them. Another advantage is that it provides quick access to funding for business owners since they are able to obtain the money that they need for their businesses within 2-5 working days. In case of online invoice financing, the individual can get the money within twenty four hours.

When you opt for invoice finance you will also enjoy the benefit of avoiding extra work. This is because when you choose a company to provide you with accounts receivable finance, you will be outsourcing the work to them. Thus, you will have more time to focus on whatever workload you are bogged down with at the moment. Moreover, pending invoices would no longer be a concern for you when you choose a third party company to take care of it. This is probably one of the most loved advantages about this method of financing which makes people opt for the solution in the first place.

Another plus point associated with invoice finance or accounts receivable finance is that it allows one to qualify for additional up-front funds, which wouldn’t have been possible in case of small business loans. Thus, it is more beneficial to opt for accounts receivable financing as opposed to business loans. Even with all these advantages, invoice factoring is not a one-size-fits-all kind of solution. It definitely has its drawbacks which make businesses opt for other modes of financing in order to tackle the financial problem they are experiencing at the moment.

One of the major disadvantage or cons associated with invoice finance which makes people not want to go for accounts receivable finance is the fact that the discount rate to be paid to the factoring company can be extremely low if the company has slow-paying clients. Also, in case the clients turn out to be unreliable or if they do not meet the standards of the factor then the company would be receiving a very low percentage upfront or they might even be disqualified for choosing such a method of financing. Thus, if you cannot rely on your customers then it is best not to go for invoice factoring.

Fast cash is often the need of the hour particularly in case of small businesses and it is in such a situation that invoice finance should be resorted to. Like everything else, this form of accounts receivable finance has its pros and cons which should be borne in mind prior to opting for it.