Receivable Financing: What are the Pros and Cons? | Behalf
Receivable Financing: What are the Pros and Cons?
Receivable financing is commonly practiced in the business world, but that doesn’t necessarily mean it is right for your company. Some larger corporations get receivable financing as a quick solution to deal with their slow and non-paying customers. Companies sell their outstanding receivables at a discount for a cash advance. The receivable financing firm takes ownership of the invoices and follows up with customers to fulfill payment. Though the process sounds convenient, it is more complicated than you might think. Still, receivable financing is a viable business financing option that could lessen the load of your accounts receivable department and is therefore worth your time and consideration. This article weighs the pros and cons of receivable financing, so you can decide if it is worth your company’s while.
One of the biggest reasons businesses opt for receivable financing is they need to save time. Many companies want to profit from their sales as soon as possible, but also feel they must extend net terms like their competitors. Receivable financing allows them to do both. Receivable financing is fast, allowing companies to close the gap between when customers make a purchase and when they actually pay. The factoring company gives merchants an advance on the invoices they buy, giving them fast cash.
Frees Up Working Capital
An advance from a factoring company frees up a significant portion of working capital that would otherwise be inaccessible. When merchants extend trade credit to their customers in the form of Net 15, Net 30, etc., their customers agree to pay but the company doesn’t have access to the funds until the customer honors their agreement. Trade credits open merchants up to a significant amount of risk. Often companies that experience cash flow gaps, have enough working capital to pay for operational expenses but it has accumulated in a particular part of the business cycle. Receivable financing is one of many ways companies can protect themselves from slow, non-paying customers and keep their business cycle flowing.
Lessens the Burden
Receivable financing companies take some of the burden off of your accounts receivable department. Once they own your company’s outstanding receivables, they make the collections. Your accounts receivable department no longer has to chase after customers and keep track of outstanding receivables. There are other things your accounts receivable department needs to worry about.
The convenience of receivable financing comes at a cost. When your company sells its receivables at a discount, it only benefits from a portion of its sales. After customers fulfill payment, the factoring company gives its merchants a final sum of money from the sales but it is still not 100% of the invoice. They take out receivable fees and charge interest on the advance. The cost might not seem to amount to much on a monthly basis, but it is typically more expensive than other financing options, including traditional loans.
Once your company sells its receivables, your company is somewhat obligated to the receivable financing company. While your company retains full ownership, it might have to relinquish control over certain business processes. In some cases, the receivable financing company can tell you not to do business with customers with exceptionally bad credit history. Though it is a protective measure, it could still become a conflict of interest.
While your company has less control, it still has to take accountability of non-paying customers. Late paying customers or non-paying customers can increase the amount you owe the receivable financing company. Their failure to pay becomes your burden to bare. In a way, you still have to answer to your factoring company for outstanding balances.
Depending on your business needs, the cons to receivable financing outweigh the pros. Instead of receivable financing, consider offering your customers a business line of credit so they can always pay you on time. Behalf’s business line of credit can increase your customer’s purchasing power up to $50,000. There are no hidden fees and affordable rates for both your company and its customers. Your business customers can make larger, more frequent purchases when they use the line of credit to pay you, the vendor. You get paid within 1 day and your customer can customize their payment schedule and extend payment to Behalf up to six months. The funds on their line of credit replenish as they pay, giving them constant access to working capital.
Learn more about how Behalf is transforming the way businesses buy and sell here.