When you finance your business operations, you also keep it running and productive for a longer time. There are, however, financial situations that might hinder your business progress. You need to find an alternative financing option that can keep your business afloat in the market. Using your accounts receivables to secure funds is among the options you can consider. Here is how you can use accounts receivable financing for your business needs.
Pledging Accounts Receivable
With pledging, you use your accounts receivable as collateral for the funds you need for your business. This essentially means the lender takes your receivables as security for the funds given as you, as the business owner, seek to collect the debts from your customers. You should, however, note that with accounts receivable financing, the lender only considers and accepts the receivables that are not overdue.
The lender examines the receivables schedule against the pending payments from your customers before funding your business needs. Pledging accounts receivables works best during business emergencies.
However, when the borrower defaults on loan repayment, the lender has the right to take over the business’s accounts receivables and the duty to collect the debts from the market.
Factoring Accounts Receivable
Factoring accounts receivables is another method of accounts receivable financing that can work for any business. As opposed to pledging the receivables, factoring involves selling the accounts receivables to secure the funding needed for the business. With factoring accounts receivables, the lender or factoring company funds your business in exchange for the value of your invoices. There is, however, a small fee that the lender pays back after receiving full payment for the receivables.
Unlike other alternative business financing options, factoring is can costly. This is because the factoring company takes all the risks in collecting the debt and recovering the pending payments. The company also incurs losses when the customers default in payment.
Factoring receivables is one way of saving your business, especially in tough economic times. With accounts receivable financing, you can stand between your business and bankruptcy as you avoid losing faith in your customers. You can also use the account receivables for your working capital as you try stabilizing your business.
When looking to fund your struggling business, you need an alternative financing option that can work. You have the best avenue when you consider accounts receivable financing. Reach out to Ideal Financial Group for proper guidance.