When you should consider selling receivables instead of getting a business loan

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If you are a small business and on the hunt for cash funding, the first thing that comes to mind is a business loan. But before securing a business loan, you should definitely compare the option of selling your receivables to get cash vs getting a traditional business loan.

Here are the reasons why:

Saves you on A/R collection costs

Cash flow is account receivables (A/R). But once you send out your bill, there is a collection time and cost to get the A/R paid. Depending on your industry, that can range from two weeks to 3 months or more. Getting a standard business loan will not make collection costs go away. Selling the receivables will, since you are selling paper that other wise you would have to wait to get paid on.

You don’t need to be in business a long time

As long as you have clients that owe you money via invoices then it does not matter if you started 60 years ago or 6 months ago. Business loans on the other hand, have a certain requirement of time in operation.

Minimal background and paperwork verification

Account receivable buyers, also known as factoring companies, do not place focus on your business’s credit and payment history, because they are purchasing paper. If anything, they are more concerned about the credit and payment history of the vendors who owe you money.

Less liability

This is a big advantage, because even if selling your receivables is more expensive than a business loan, you are not adding more liability.

Selling your A/R does not require any collateral such as property, equipment or business assets, minimizing risk in case your business slows down.

Faster Funding time

Once a factoring company agrees to purchase they A/R, funding is as little as 24 hours. This fast approval time helps your cash flow if you need to pay your vendors, employees and suppliers.

If you are wondering if you have enough receivables to receive the amount of financing you need for your business, it is best to speak to several companies that purchase A/R and negotiate with them the most favorable rate. Standard rates of purchase are 70-90 percent of the A/R amount, so the higher they pay, the more money comes to you. Also, different companies have different guidelines on the A/R and its best to choose the company that has the most flexible underwriting.

Another important aspect is to discuss with each A/R factoring company if they are recourse or non-recourse. Recourse means that if the A/R does not get paid by your vendors, you are still responsible to pay each uncollected invoice. Non-recourse releases that responsibility. The rates of purchase may change based on this and it is important to discuss with each factoring company these terms when you apply.