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Mitigate business risk with your accounts receivable

Updated on :  

08 min read.

Accounts receivable is a crucial asset to any company as it generates cash inflow. They indicate how much a customer owes to the business for goods sold or services provided.  Effective receivables management techniques help to prevent late payments or non-payments.

Understanding accounts receivable financing

Accounts receivable financing enables companies to get early cash on their outstanding invoices. It is an easy way to monetise your company’s outstanding invoices. The company providing the loan will charge a fee for providing such service.

In simple terms, it is an arrangement between the business and the lender wherein the business obtains a loan from the latter against approved invoices. It provides short-term cash injection during a liquidity crunch.

Accounts receivable financing is of two types:

  1. Sale of accounts receivables: In this type of financing, the business sells its unpaid accounts receivables to the financing company and gets a percentage of cash against submitted invoices. Upon completing the credit period, the financing company will reach out to the customers for invoice collection. On receiving the complete payment, the financing company will pay the balance amount to the business after deducting its fee.
  2. Loan: In this type of financing, the business will not sell its outstanding receivables. It will keep the accounts receivables as collateral for obtaining a loan from the financing company. The financing company will charge a fee for providing such a loan. On completion of the credit period, the business will have to collect the payment from its customers. 

How can financing accounts receivable help businesses?

Accounts receivable financing helps the business to mitigate risk during a crisis. Some of the advantages of using accounts receivable financing are:

  1. Fast cash access: Accounts receivable financing helps you convert unpaid invoices into cash right away without waiting for your customers to make a payment. These funds can be used to buy more inventory, pay your employees, market your product, etc.
  2. Easy way of finance: Accounts receivable financing is an unsecured way of financing. Here, finance is provided against outstanding invoices and no asset is kept as collateral. This is beneficial for small businesses.
  3. Helps to overcome the backlog: The outbreak of the pandemic and lockdowns have disrupted the business operations. Businesses need to explore alternative revenue generation ideas to come back to normal and maintain a stable cash flow. Thus, accounts receivable financing will help the company overcome the slump suffered in the past.
  4. Less stress: Fast and easy access to cash gives you peace of mind, and you can focus on more important business tasks related to business growth and sustainability.
  5. Building strong relations with its vendors: Many businesses are dependent on their accounts receivable to make payments to their vendors. So, if funds are stuck in the outstanding invoices, one can take finance against them and make payments to its vendor. This will stabilise cash flow and help build good relations with its vendors.