Every business needs a boost in working capital from time to time. AR loans can get you this instant cash flow fast and without the hassle. AR loan is also known as another way of AR financing. Non-bank financing for business provides you with efficient and inexpensive methods of obtaining cash.
How Do AR Loans Differ from Traditional Bank Loans?
When you apply for a business loan from a bank, they are going to scrutinize your business practices to ensure that you will be able to make your monthly payments. They could require a business plan, as well as information on how you are going to use the loan.
Your credit history is usually checked. Also, the bank may ask that you provide a form of collateral for the loan, such as your equipment or other property. The entire process can take weeks to complete, and there is no guarantee of approval.
If you get the approval, you will have to make monthly payments towards the loan that will include interest applied to the money borrowed.
The only similarity with a bank loan and an account receivable agreement is that you are obtaining cash. A non-bank factoring company does not need to go over your business books because they are securing the cash advance with payments that have already been promised to you. Your business credit rating is of little importance, and you can get approved in days. Most importantly, interest rates for the cash advance. Instead, a small fee deduction from the amount of money given to you at the beginning of the transaction.
What is Non-Bank Financing for Business?
There’s been a rapid increase in the business lending industry, but not through traditional banks. Alternative lenders are sprouting up to give cash advances to businesses, using various methods of collection. Some offer merchant financing, which deducts payments from credit card sales. With a business structure that relies on invoicing, factoring receivables become a viable option.
If your company generates invoices, you often have to wait for payment. Waiting for payment of invoices can be a painful process depending on the terms you stipulate with your customers. Factoring receivables allow you to get a cash advance based on those unpaid invoices. The non-bank factoring company then becomes responsible for collecting the payment while you get a boost of income for your business.
What Type of Business Structure is Suitable for an AR Loan?
You can structure account receivables loans to meet any business. A retailer with direct sales will benefit most from merchant loans as these allow you to pay back the money through your credit card sales. If you are offering your customers credit by invoicing your products or services, then factoring receivables is the better option for you.
When you apply to a factoring company, they will check the creditworthiness of your customer and confirm the validity of the invoice. You will then be advanced the face value of your submitted invoices, minus a percentage that covers the cost of the transaction. The factoring company will then become the party responsible for collecting payment from your customer.
What Happens if a Customer Does Not Pay the Invoice Used for Factoring Receivables?
The most significant risk posed by invoice factoring is the possibility of non-payment by your client. Non-recourse factoring mitigates that risk. In this case, the factoring company assumes responsibility for the invoice, whether it gets paid or not. The only exception being if you faulted on your end of the deal.