receivables funding

The Difference Between Receivables Funding And Working Capital Loans

A small business needs constant cash flow to stay healthy and accomplish its business goals. A business needs money to expand, extend credit to its major customers, make payroll, and meet unanticipated demands. Your company’s cash conversion cycle may mean that money is not always readily available to accomplish these goals, prompting you to seek short-term financing either through receivables funding or working capital loan. But what is the difference between account receivable funding and a working capital loan? This article will answer that question.

What Are Accounts Receivables?

Receivables funding is also referred to as business receivable factoring and invoice receivable financing. It is a funding source for companies who are not eligible for traditional types of loans, often because they have maxed out their debt or do not have high enough revenue. Invoice factoring converts an invoice due in 90 days into immediate cash for businesses such as yours.

This form of funding gives you a flexible type of credit you can draw from when needed. Generally, you sell your invoice to a lander for immediate payment. You receive a large amount of money upfront, which could be 80% to 95% of the total invoice amount. Once the invoice is due for payment, you receive the remaining amount less the lenders’ fees. The factor collects the payment from your customer.

What Is A Working Capital Loan?

A working capital loan is also known as a merchant advance and is used to finance a company’s everyday operation or short-term operational needs. The lender requires you to have collateral. The collateral may include business assets such as accounts receivables, real estate, or financial assets. The terms of the financing will depend on the lender, your company’s sales revenue, and your credit history.

Advantages Of Accounts Receivables

The processing time for receivables funding is relatively short and may take about two weeks or less. You can accelerate your cash flow almost immediately as the factor waits for your client to clear the invoice. This means that your business operations will not stop because of a lack of cash flow. Accounts receivable companies don’t need any collateral, which is a huge advantage for small businesses who might not have the assets to put up as collateral.

The easy access to capital also means that you can focus on growing and expanding your business, which gives you greater peace of mind. Business factoring loans also give you the freedom to get as much credit, and you need to run your business. The majority of factors don’t have a limit on the number of invoices you can receive financing on or a limit on the amount you can receive. This is a huge advantage as your capital will not be tied up in invoices.

Any business can qualify for accounts receivable funding as long as they have receivables from the government or another business. If your company has a lot of capital tied up in invoices, you should consider receivables funding to free up some or all of the capital, so your business operates without straining. The difference between invoice factoring and a working capital loan is clear. You can make an informed decision on which one will serve your business better.

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