One of the least understood, seldom mentioned, and under-utilized ways to finance your business is through accounts receivable financing. In simple terms, this solution involves selling your company’s invoices to a financing partner in exchange for upfront cash, which you can use to pay your bills, make payroll, or reinvest in your business. The financing partner then takes care of collecting payment from your customers, freeing you to focus on running your business. Unlike debt, your company’s creditworthiness is less important than the creditworthiness of your customers, so receivable financing can be a good option for businesses that sell to well-established, stable businesses but might have long payment terms, preventing predictable cash flow in your business.
Choosing the right financing partner is critical to a successful cash-flow strategy. Spending a little time and effort to assess the financing company will reap dividends in both the short term (improved and stabilized cash flow) and the long term (prompt vendor payments, timely tax payments, improved financial condition, etc.) Here are some critical components and signs of a quality accounts receivable financing partner:
Does the financing company have a track record of honesty, follow-through, above-board business agreements, and repeat clients? It can be difficult to find this information unless a company is established and you can find verifiable reviews and experiences, or know a client. Reputations do tend to permeate the business community, however, so a little digging could yield valuable results. Ask for several referrals from the financing company’s current client base. Call them and ask how they perceive working with them – is the company responsive to clients’ requests? Do they provide thorough and timely information? Has there been any negative feedback from the referral’s customers? Were there any “surprises” along the way? Asking a few probing questions may save time and headaches in the future!
Accounts receivable financing companies that are part of a banking institution are highly regulated. A bank-affiliated financing partner complies with the same privacy, safety and soundness, and anti-fraud regulations as their bank holding company. A bank-affiliated financing company usually performs a deeper level of due diligence and underwriting than a non-bank, non-regulated company will, which is to your advantage. You and the financing company will know each other more thoroughly, establishing the basis for a longer-term relationship within the bank. A bank-owned financer may have other resources for your company in the longer term – you may be able to transition to an asset-based loan or other lending products the bank offers over time. Additional services, such as Treasury Management, may also be available to your company – adding the convenience of banking to your receivable financing relationship.
A major concern we hear from accounts receivable clients — How will the partner work with my customers? No one wants a partner that does not treat your customers properly. A respectful receivable financing company will work with you to make you comfortable with their process, communicating openly and honestly, and will treat your customers like their clients. Financing partners have a vested interest in helping you to maintain your client relationships so you continue to deliver goods and services to them. A financing partner who communicates well with your customers can enhance your relationship with your clients.
Look carefully at the terms and conditions of the accounts receivable financing agreement and other legal documents. Are the terms and conditions the same as those initially proposed? Do you thoroughly understand the pricing and fees? Has your receivable financing representative explained everything completely and answered all of your questions? Taking the time to read the documents and/or have them reviewed by an attorney may prevent making a poor choice you may regret. A financing representative who doesn’t sit down with you to answer your questions honestly and offer full disclosure regarding pricing, terms, fees, guarantees, and the financing is a red flag signaling you to go elsewhere.
Patient & Thoughtful
Sometimes companies seek out accounts receivable financing because they are in a cash-flow crunch and need to quickly meet one or more financial obligations. While the temptation may be to accept whatever financing arrangement is in front of you, take the time to compare financing companies and try to obtain more than one quote for services. Press the brakes on any partner who rushes you to sign documents or delivers high-pressure tactics.