Outstanding invoices that customers have not paid you may hold immediate value despite difficulties with collection efforts. Utilizing receivables to obtain financing can help you offset some of the hardship that late payments present and enable you to make ready use of them as working capital.

Financing With Selective Receivables

Some small businesses equate receivables financing with factoring, one of the most common forms of accounts receivable financing. With most types of factoring agreements, a third-party company purchases the receivables outright for a reduced sum. Alternatively, they may charge a fee equal to a fixed percentage of the receivable’s values.

Selling interests in selective receivables differs from this traditional format in a few important respects. First and foremost, companies choose which invoices to sell. They do not have to offload every outstanding in a single transaction. Instead, they may pick and choose which invoices to assign. Secondly, they can complete transactions through a clearinghouse that many finance companies and syndicates of investors have access to. This may help to facilitate access to more competitive compensation that a business would get from selling receivables to a single party.

Keeping Debt in Check

A big part of the appeal of accounts receivable financing is that it gives companies a means to draw in more working capital while keeping debt off their books. This is not necessarily true of all agreements involving secured interests in receivables, but it is largely true of the most popular financing models.

Avoiding debt helps businesses stay cash positive when the proceeds of a financing deal have been exhausted. They don’t have to worry about repaying a debt because they have either sold their invoices outright or they will be able to derive sufficient resources to pay financiers their fee from a transaction after customers have paid their invoices. In effect, this financial management tool is less risky for your business than other lending options because it doesn’t entail taking on new debt that you’ll have to make payments towards month after month.

Protecting Credit

Another big advantage of harnessing unpaid invoices to get working capital immediately is that it can spare businesses from overutilizing credit. Using too much available credit from charge accounts or commercial lines of credit can have a detrimental effect on your credit. Typically, financing with accounts receivables does not impact your credit score, and it lets you keep your current credit utilization ratio intact.

Ultimately, receivables financing could help your business stay solvent. It will also support your efforts to build and preserve business credit as you work towards growth.