Is Accounts Receivable Financing for All Businesses?

Accounts receivable financing is a method of financing that leverages a company’s receivables into immediate cash flow which can help meet the working capital needs of a growing company, but is this good for all businesses.  It sounds like this would be a simple answer…but it’s actually not.

Some companies account receivable financing needs are great, but others do not require this type of financing.  Companies that would obviously benefit would be companies with high receivables, right? Wrong.  Many importers and logistics companies have large amounts of receivables, but accounts receivable financing would not work in many of their cases because their margins are too small.  Typically, if a company has margins under 12%, then the company needs to examine its use of account receivable financing carefully because the cost is often around 1.5 to 3% which might be equal to their net profit.

Business finance companies that have experience in the art of accounts receivable financing and will often be able to advise a company, but if you know your company’s margins are small and the factoring company does not ask about these details then you know you should be shopping for another invoice factoring company.

Traditionally, a business should have +30% gross margins to use account receivable financing as a tool.  This is necessary because there are many Sales and Administrative costs which can reduce a gross margin to almost zero so adding a financial cost from business finance companies can be too much to burden.

Accounts receivable financing needs to carefully thought out and approaching business finance companies or factoring companies with a long history definitely will help your outcome result in success.