Account Receivable Financing is a way to generate short term funds for your business, but before we look into that, let's review some of the basics.
Working capital is one of the most important necessities for a small-business owner.
By definition, working capital is the amount by which your current assets exceed your current liabilities. Your 2 big current assets are your inventory and your accounts receivable and your main liability is your accounts payable.
And most businesses cannot finance their operation successfully just by depending on their accounts receivable to come in. They usually need an external source of financing.
The five most common sources of short term financing are equity, trade creditors, factoring, line of credit and short term loan.
Equity – on a short term basis, usually in the first year of operation, you may need to rely on some extra funds injected by you, a family friend, friend or third party investor.
Trade Creditors – if you have a good relationship with a supplier, perhaps you ask them to extend their payment period on a one time or short term basis. Be careful though. Your suppliers are your lifeblood and if they feel you are abusing them they might restrict your credit terms or cut you off totally.
Factoring – this is the account receivable financing. This is where you sell your accounts receivable to an outside source. They buy them off you for less than their value and then they do the collecting. It's an expensive way to finance your business and should only be done when other avenues fail.
Line of Credit – a line of credit can sometimes be difficult to obtain for a new business, but it allows you to borrow funds for short term needs.
Short Term Loan – this type of financing can be good for building up seasonal inventory or producing a large order and then paying off the loan when the accounts receivable come in.
Since cash flow is the name of the game for all business owners, a good understanding of working capital, and knowing your financing options, is imperative to making any venture successful.
