1 September Benefits of AR Finance during times of uncertainty
What is AR Finance?
AR finance is also known as Accounts Receivable Financing. Every business passes through vulnerable phases, some within control, some outside control (read Covid-19). Predicting such vulnerabilities can be difficult or nearly impossible for businesses. And it is especially during these vulnerable times that organizations need an urgent influx of capital. Applying for loans from financial institutions is not always possible as getting approval for the loan is a time-consuming process.
During urgent financial needs, businesses can refer to their accounts receivable collection to access quick funds. Ready Commercial Capital can help businesses to connect with a factoring company. A factoring company accepts the accounts receivables of an organization and in return, they provide the agreed amount. In general, these lending companies provide 70% to 90% of the receivables offered by an organization.
The factoring company takes the responsibility of collecting receivables and after the collection is complete, the balance amount is provided to the organization in need of money. In fact, businesses can use their cash flows strategically to cover their immediate needs. Let’s discuss the different options available.
Different options of AR Finance
The three different forms of AR financing, businesses can opt for, are discussed below:
Traditional factoring – traditional factoring is a common type of AR financing. Here the lending company offers a certain percentage of the value of the handed over receivables to an organization in need of funds. However, the fund seeking organization has the option of invoice factoring.
That means, the fund seeking organization can select the specific invoices they are willing to utilize for AR financing. Therefore, when a company is in need of urgent funds, it would hand over all its invoices to the factoring company, and in return will receive certain amount of funds on the basis of the valuation of all invoices.
Asset-based lending – this type of AR financing is also known as a business line of credit. Here, the receivables must be selected depending on the customers’ credit quality. In terms of charges of factoring, this asset-based lending is the most costly option available.
Selective receivables – The final factoring option that many organizations opt for is known as selective receivables. Here the fund seeking company has the most benefits. It is the responsibility of the fund seeking company to hand over only those invoices to the factoring company that they believe are useful.
However, the difference between selective receivables and traditional factoring is that, for selective receivables, a company will get the entire amount associated with the handed over receivables and not only a certain amount of percentage. Hence, selective receivables financing is more beneficial from the other two options indeed. Additionally, the fees for this type of AR financing are lesser than the first two options.
How AR finance can help during periods of uncertainty?
Accessing urgent funds – during uncertainty, businesses require sources of fast cash. However, for a running business, accessing quick cash is not always possible. The business principals can put in capital but usually limited by their personal situations.
Instead, by taking advantage of AR financing, organizations can convert their receivables in quick cash. It is the responsibility of the AR financing company to release cash within hours. Organizations can maintain their credibility in this way and their urgent needs of funds can be fulfilled.
Business growth – when organizations try to recover their receivables from clients, the entire process becomes largely time-consuming. As a result, the businesses have to sacrifice time that would rather be spent focusing on their growth.
Instead, by collaborating with an AR financing company, it gets easier for organizations to recover their receivables. Businesses can shift their focus towards other operations and as a result, business growth becomes a lot more predictable.
No needs for collateral – traditionally, financing would only take place in the presence of collaterals. In those cases, organizations would have to keep some of their assets as collaterals to financial institutions and they would receive funds against the collateral.
The benefit of AR financing is that there is no such need of collateral. However, for a factoring company to accept an organization’s business, it is necessary for the company to have a reputed market presence and good credit rating. The factoring companies are often engaged in analyzing and tracking the borrowing companies’ credit histories to rank them. The abilities of clients of the borrowing companies to make any type of payment is also a decision making factor. The factoring companies prefer working with clients who are reputed in the industry and have sufficient financial capability to pay the invoices.
Any organization, irrespective of its size requires urgent funds. Accessing such funds is very much essential for business growth and success and services like AR finance assist businesses with such financing needs. With AR finance, businesses are able to focus on their growth without worrying about having to chase clients for payments or putting up any collateral to access funds.