Sometimes, small businesses and startups will face an immediate existential crisis. Their business will do just fine, but they will face an impassable financial obstacle and will have to learn how to survive. In this situation, there are those that look for partners, those that look for loans and those that sell their account receivable. Even though all three of these options you have pros and cons, most people find the last one to be most advantageous. Here are several reasons why.
What are Account Receivables?
It is important to understand what account receivables are in the first place. When you sell something or conclude a deal with someone and that person promises to pay you on a monthly basis, that money is account receivable. As simple as that. You gave someone a product or provided a service and for that, they owe you money. While technically this money is yours, you don’t have it at your disposal as of yet. Some companies are willing to buy off the rest of this debt, pay 80 percent of it in first 24 hours and then the rest once your customer pays. What they keep is a fee that never exceeds 5 percent of the full price.
You Don’t Owe Anything
If you decide to get a loan, you will get your money, but will constantly have it over your head that you owe something to someone. You sell a part of your business. A similar situation also occurs if you get an investor or partner. Sure, some would argue that it is better to split profit with someone than to have no profits to begin with, but it can still be a bitter pill to swallow. On the other hand, once you sell your account receivables, you sold them. They are no longer yours. You can just forget about them and move on. In return, you get the financial aid that you need and everyone wins. Using invoice funding is a one-time deal, and you don’t need to deal with monthly payments or bureaucracy.
Dealing with Interest
Another thing you need to be preoccupied with raising a loan is how much money you are going to lose in the long run. With large loans (and you might require a large loan sometimes), interest can make up a significant portion of money you return to the bank. This is why interest should never be underestimated seeing how some banks even keep the right to change interest over time. This kind of unpredictability is one of the most important things you will avoid by selling your receivables. You sell one value and get another back. At the end of the day, you have a straightforward deal in front of you.
Someone Else Takes the Risk
While most people do hold their end of the bargain, not all people are as honorable. Some just get the product and then stop paying after a month or two. On the other hand, this halt in payments is not always caused by human malice. Sometimes, even the most honest of men will be unable to continue with payment. The only thing you can do in this scenario is prosecute them, but it could take a while until you are able to get your money back. Meanwhile, you are causing a whole array of unpleasantness to everyone (possibly even harming your public image). Then again, by selling your account receivable to someone else, you are letting them take the risk and you no longer need to lose sleep over this. All of it is someone else’s concern now.
As you can see, while getting a loan or asking people to team up with you may seem as a good short term idea, in the long run it might be better to sell your receivables and get over with it. The best thing about this is certainty that no other deal brings you. With loan, you can’t know how much your monthly fee is going to amount (due to volatile interest inflation). You also can’t possibly know what your new partner is going to do with their shares. On the other hands, with invoice funding you know exactly what you get.