AR (Accounts Receivable) financing is a common form of business financing. The process entails selling outstanding invoices or receivables at a markdown to a professional finance or factoring company. This company is usually referred to as the factor. It takes the risk linked to the receivable and, in return, gives a business a swift cash influx. Typically, the amount issued depends on the receivable’s quality and ‘age.’
How AR Financing Works
There are several forms of AR financing. An entrepreneur opting for AR financing must understand if their contract is structured as a sale of assets or as a loan. Account receivables are outstanding and unpaid bills due to a company. These items are recorded as current assets on the balance sheet and are viewed as liquid assets of a business that can be easily turned into cash.
Pros Of AR Financing
- AR financing is a form of unsecured business financing where the business doesn’t need any collateral in the form of guarantors and assets.
- The business owner retains full ownership of the company—no need to surrender part of the business to get AR financing.
- Typically, the ‘factor’ can process the finances within 24 hours after a business submits its forms.
Cons Of AR Financing
- Although AR financing is a quick way of accessing money for your business, the rates and cost of the financing may be higher than other forms of loans. Failure to repay the amount issued within the specified time increases the total amount you should pay.
- Although some contracts may be viable and short, others may be winding and longer than you think. However, it is essential to negotiate your contract’s length to suit your business needs and objectives.
- The business or person that owes you may fail to pay the factoring company. In this case, you are usually on the hook for what they should have remitted.
A business usually needs finances to cater to its needs. This helps keep it running and enhances its general growth. As an entrepreneur, choosing the right financing company is critical. At 18 Sierra Financial, we are ready to help. Contact us today for reliable financial solutions.