Published On: Mon, Aug 26th, 2019

Five advantages and disadvantages of receivable financing

The world of business is all about ups and downs. Regardless of how stable your cash flow might seem, there is no guarantee that the same situation will persist for a long time. It is especially true for small businesses because they often come to a dead-end due to this very issue. 

As a businessman, one way to get yourself out of the uncertain cash flow scenario is to obtain receivable financing. Depending on the quality of your invoices, the factoring company could issue up to 80 to 90 percent of receivables. However, receivable financing has both dark and bright sides. 

photo 401(K) 2012 via Flickr

First up, let’s discuss its top five advantages:


  • Your Business does not Remain on Standby


That’s the top of the list aspect of the receivable financing. At times, companies with limited resources have to wait for 60 to 90 days to get their cash from clients. Undoubtedly, this could prove to be a big blow to any business because being cash-strapped brings your business to a stalemate. 

Once you have run out of the cash, it becomes very tough to meet day-to-day expenses. Moreover, you can even lose some of your best clients since you don’t have money to take new orders. There could be a variety of reasons why you need money in the tank to run your business successfully. 

In such a tricky scenario, receivable financing can take you out of the trouble. It takes hardly a week to get funds through receivable financing. What’s more, in some cases, the applicants get their amount within 24 to 48 hours.


  • Receivable Financing is User-Friendly


Receivable financing is user-friendly because there are not as many hurdles in the way of availing this kind of funding. We have seen different types of loans where the eligibility criteria could be tough to breakthrough. Luckily, that’s not the case with receivable financing.  

Irrespective of the size of your business – big, medium or small –you can apply for account receivable financing. Unlike traditional loans, you have complete authority to finance as much or as little amount you want. 

In a nutshell, the process to receive this loan is much easier compared to the bank loans. The flexible terms give businesses the much-needed breathing space.


  • Additional Services Offered


By turning to a factoring company, you free yourself from other challenges associated with the collection process. It includes crucial tasks like processing, reporting, and posting. In simple words, you can forget about all the headaches related to the paperwork of the collection procedure.

That way, not only you end up saving up a lot of time and energy but, at the same time, you can focus on other important assignments and take your business to the new heights. 


  • Enhances Growth Opportunities 


Without the shadow of a doubt, receiveable financing does take your stress away. As a result, you derive the much-needed peace of mind. As soon as you stop worrying about the payment issues, you can focus more keenly on the other aspects of your business like marketing and selling.


  • It’s a Non-Debt Solution


Factoring companies pay you for the work you have finished. They do charge a fee in return for their services, but you are not liable to any debt. It does not allow your spreadsheet to be spoiled. In other words, you can go for many types of loans by keeping your spreadsheet in good shape.

You can’t make up your mind about what is receivable financing without knowing the other side of the picture. 


  • You May Earn a Bad Reputation


Factoring companies can have a bad influence on your business in terms of reputation. There is a certain “stigma” that goes along with receivable financing. As you switch to a factoring company for the receivables, your clients get an update on this development. 

The majority of the people consider that turning to a factoring company indicates that your business has cash flow problems and they might abandon shopping from you next time. 


  • Possible High Costs


As an old maxim goes, “There is no such thing as a free meal.” Same stands true for the account receivable financing. Don’t be surprised when you realize that you could get a traditional loan cheaper than receivable financing. 

As for the fee, typically, factoring companies charge up to 1 to 4 percent of a receivable. Further, they can charge significant interest on the cash advance. On the month-to-month basis, this amount might not look as gigantic but, if calculated annually, it can account for a reasonably high sum.


  • You May Lose Control Significantly


The moment you accept the receivables, the factoring company can start to intervene in your business to a considerable extent. For example, you can be denied to do the business with a particular client considering his payment history. Allowing this much space to an outsider could prove to be very costly.


  • The Contract can be Lengthy


Contract length becomes a bone of contention in receivable financing. As times, the contract can prolong for about three years. A savvy businessperson can imagine the stress of such a lengthy deal. 

However, as receivable financing gains popularity, short-term contracts are becoming common with every passing day. Thus, we would suggest you discuss the contract length with the company while negotiating terms and conditions. 


  • Quality of Clients Decides the Rate


No business is entirely free of bad clients. All the brands, small or big, have their share of both good and bad customers. In all likelihood, the same is going to be the case with you. 

Every factoring company has some set of standards. If your clients don’t subscribe to these standards, then it can affect the discount rate you get by your factor. Unreliable customers could be a liability, and no factoring company would like to take a risk. 


Like most of the loan schemes, receivable financing has a share of both positive and negative aspects. While it could be tempting to pick up the phone and call to a factoring company when you are yearning for financial stability, you should also go through the thick and thin of its possible drawbacks.

Author: Sherley Alaba

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