Picking the Right Accounts Receivable Financing for Your Startup
What is Accounts Receivable Financing?
Accounts Receivable Financing is a type of debt financing in which a company can borrow capital from a lender based on a portion of their accounts receivable. This type of financing is great for businesses with large customer accounts or unpaid invoices to receive cash quickly to not stifle growth.
There are three different types of accounts receivable financing: asset based lending, factoring, and selective receivables finance. Each type serves a different purpose depending on your need for the capital and how you want to acquire it.
Asset Based Lending
This form is well known within debt financing. It is a loan agreement that is secured by collateral. It’s considered an on-balance sheet technique that generally comes with high fees. This type of accounts receivable financing isn’t ideal for businesses without significant assets or businesses that need flexibility.
Factoring is a type of financing where a business sells its accounts receivables at a discount to a third party financier. You can get cash quickly through factoring - sometimes within 24 hours. There is more flexibility with factoring than there is with asset based lending, however fees can still be high.
Selective Receivables Financing
In this case, businesses can choose which invoices to advance for early payment, giving you the most flexibility. They can also secure the full payment for each receivable, as opposed to selling invoices on a discount in factoring. This method isn’t always considered to be debt based, because the selected receivables stay off the balance sheet. This may not be right for you if you are considering building up your creditworthiness. However, the fees are generally less compared to the other types of accounts receivable financing.