For some companies, cash flows out more quickly than it flows in, especially if they have to be paid for one substantial project before purchasing the supplies for the next one. This disparity between completing the work and your clients paying on their accounts can lead to missed payments or late fees on your end. While you could shorten the repayment timeframe and hope to keep your customers, you can also turn to accounts receivable financing for an advance on what you are owed. There are three basic types of A/R financing you can choose from, each with unique features and benefits.
ABL is an on-balance sheet technique known as traditional commercial lending or a business line of credit. It requires you to commit the majority of your accounts to the program with limited flexibility in which ones you can choose. Asset-based lending typically comes with higher fees than other types of A/R financing but is often the easiest to find and secure. Because it stays on your balance sheet as debt, ABL may impact your ability to take out loans or open lines of credit elsewhere.
Sometimes the terms factoring and accounts receivable financing are interchangeable, while the terms are very similar, traditional factoring is more specific. You have more freedom to choose invoices to factor than in ABL and sell them to a funder for a percentage of their value. Once your client pays the invoices, you will repay the advance plus a fee. Factored receivables will remain on your balance sheets as debt, and your line of credit from the factoring funder may be smaller than with asset-based lending.
Selective receivables finance
With selective receivables financing, you choose which accounts to factor and can be advanced the total value of those invoices. This method stays off your balance sheets and typically has the lowest fees of the three types. It can be more difficult to find factors that offer this type of financing, and the creditworthiness of your clients is considered with the application.
For many companies, accounts receivable financing is the best way to stay on top of the bills while still giving customers time to pay for significant projects you have completed. There are many different types of A/R financing, and knowing which one is the best fit for your company can save you in terms of funder fees and flexibility of choice.