Getting a loan is difficult for anyone with either bad credit. However, for entrepreneurs and small business owners it can be especially frustrating. Acquiring the capital needed to maintain an adequate level of cash flow can be hard for many start up businesses. Having little credit or bad credit can make this struggle even worse.
Accounts receivable financing is an option that works well for many businesses that cannot obtain a traditional loan because of bad credit or lack of credit. For some small business owners it is a good way to attain funds until they are back on their feet or until they can qualify for a better loan.
Accounts receivable financing, also referred to as factoring, is when a business sells its open invoices at a discount to a financial company known as a factor. Different third-party factors will have different liability expectations, interest rates, and terms of service, so it is important to find a company that will work best for you.
Many factors will take on the full liability of the invoice once they purchase it from you–meaning that if they cannot get the money from the debtor you will not be liable. Factors who perform in this way typically only buy open invoices for companies or individuals with a good credit history and/or will pay less for the invoice because of the risk of not being paid. There is is also recourse factoring in which the business does hold some liability if the invoice is not paid.
There are two big perks to factoring. One is that you can get cash quickly for your company. Sometimes you can get money within 24 hours for your invoices. The second major perk is that your personal credit is not an issue. The factor generally only focuses on the credit worthiness of the debtors whose open invoices you are selling. Invoices are always sold at a discount because of the risk of non-payment. Factors take this in to account when determining how much they are willing to pay for an invoice.
Accounts receivable financing works best for companies that have many invoices from clients or customers who have not paid. It is a great way to obtain cash quickly, but it is important to choose invoices that will allow you to make either a small profit or to at least break even. It is also important to shop around for a factor and read through each factor’s policies and procedures carefully.
Learn more about Phoenix small business funding. Stop by Persephone F. Gelson’s site where you can find out all about small business loans in Arizona, as well as other financial options, and what they can do for you.