Why do small businesses have it so rough these days?
It all boils down to a lack of financing- or time to wait for regular banks.
According to the US Small Business Administration, 30% of all small businesses are going to fail simply because the business runs out of money. The same organization says that only 26.9% of small business loan applications are approved by big banks and 45% of small business owners don’t even know that they have a business credit score, to begin with.
These are not good statistics.
Thankfully though, if you’ve already handled the heavy lifting and started a small business and are now looking to grow and expand your dream the odds of success are definitely in your favor – particularly if you use your Accounts Receivable as an asset to lock up the financing you need moving forward.
Are accounts Receivable an Asset?
Your Accounts Receivable (AR) that nothing more than the incoming cash you have from invoices and sales transactions that just haven’t hit your books or your bank account yet. This means that for accounting purposes they are treated as an asset.
Assets are a huge piece of the puzzle when you are a small business owner looking for financing as you will be able to use those assets as collateral to secure traditional loans, lines of credit, and other financing packages you might not have had an opportunity to leverage otherwise.
In the world of business accounting using your AR as collateral is frequently described as “pledging” and it’s a move that is a significant amount of successful businesses take advantage of when they don’t have physical equipment or tangible assets they can use as collateral.
At the same time, putting up your AR as collateral is going to shoehorn you into a handful of very specific lending packages that you will be able to take advantage of – usually with some limitations on the percentage of your AR that you’re able to get as funding moving forward.
Just as an example, a particular lender may not allow you to “count” any of your Accounts Receivables that are 90 days old or older. They may only allow you to take advantage of credit secured with collateral on your ARs that are 60 days old or younger, or maybe just 30 days old.
These kinds of agreements will differ from one lender to another but you’ll be glad to know that Accounts Receivable are a pretty common piece of collateral used in financing deals, even if you aren’t particularly familiar with this approach (just yet).
How to Use Accounts Receivable as Collateral
There are three different ways that you can take advantage of AR as a form of collateral, really dependent on the type of financing that you are moving forward with.
For starters, a secured traditional bank loan that is extended to you with your AR as collateral is probably the most straightforward and simple way to get financing with this approach. You might have to pay higher interest rates with a secured loan compared to an unsecured loan (though this isn’t always the case), but for the most part you putting up AR as collateral is the only difference between the two.
Secondly, you might choose to work with a lender that allows you to “pledge” only a portion of your Accounts Receivable over a very specific block of time as collateral. This typically comes in the form of invoice factoring. Typically you sell a specific invoice that’s due from 30-90 days and receive payment in advance from the factor. You can typically get up to 90% of the cash value of the invoice.
This is particularly useful if you have a couple of big deals in the pipeline that you’re waiting on payment for but need the rest of your Accounts Receivable for cash-flow purposes, letting you use the bigger deals as collateral to get financing in a hurry without really handicapping your cash flow situation across the board.
Lastly, you might take advantage of a business line of credit opportunity that “draws” from your Accounts Receivable on a regular basis. Each time you process a new transaction and add a new entry into your Accounts Receivable a portion of those payments had directly to pay down your loan, similar to a working capital kind of lending opportunity.
Benefits of Accounts Receivable Financing
There are a couple of big benefits that using AR as collateral to secure financing offers you, including (but definitely not limited to):
Low Credit Score, No Problem – Even businesses and entrepreneurs with less than picture-perfect credit scores and credit history can take advantage of Accounts Receivable financing packages, largely in part because they are securing loans they wouldn’t have had access to with this form of collateral.
It may not make your credit score immaterial, but it’s definitely going to give less than ideal credit score businesses and entrepreneurs a chance to get the financing they wouldn’t have gotten elsewhere.
Almost Instant Financing – Another huge benefit of using your Accounts Receivable to secure your new way of financing is that it gets you money almost immediately, with most lenders offering these kinds of financing packages providing you with the entirety of your loan inside of 24 hours (if not immediately).
The application and approval process is very streamlined and very fast.
Industry Agnostic – Best of all, Accounts Receivable financing packages are available to pretty much any business owner running any kind of business and in any industry, niche, or marketplace.
Traditional lenders usually aren’t quite as flexible with unsecured loans in industries that have a lot of volatility, little opportunity for success, or sky-high capital demands that can put a lot of stress on new or unproven entrepreneurs. AR collateral secures your financing to eliminate those concerns.
Conclusion
At the end of the day, whether or not Accounts Receivable financing make sense for you is going to come down entirely to your business goals, your financing needs, and whether or not you’ve built up enough of an asset in your Accounts Receivable to make it a valuable piece of collateral going forward.
For most small business owners, though, being able to use AR as collateral in the future give them a huge amount of peace of mind and security knowing that the odds are good they’ll be able to leverage financing when needed thanks to this asset being put up as collateral.
Mathew Jade
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