Accounts Receivable Financing vs. Supply Chain Financing

There are many different types of financing that businesses can take advantage of. Financing isn’t just about providing large sums of money to help a business get off the ground. There are also funding solutions that exist to help with the “behind-the-scenes” executional aspects of the business, which can be tedious and time-consuming. One of the most challenging obstacles small businesses face today is making sure they get paid by their vendors and suppliers in a timely manner. Two critical areas of small business financing are accounts receivable financing and supply chain financing.

What is Accounts Receivable Financing?

Accounts receivable financing, or factoring, allows businesses to get payment on their outstanding invoices without the typical 30-60-day wait time. It is an arrangement whereby a company receives financing based on a portion of the money it is owed by its customers (usually 70-90% of the amount of outstanding invoices). Essentially, the factoring company is financing those slow-paying invoices.

HOW IT WORKS

Factoring companies take many things into consideration when determining how much accounts receivable financing to offer a business. Attributes such as size of company, age of outstanding invoices, ease of collection and credit history of clients are some of the things a financial institution might evaluate prior to entering into an agreement with a business in need of financing. There are some companies, like ExpoCredit, that provide instant access to working capital without a lengthy approval process or long wait times generally associated with bank loans.

THE BENEFITS

Accounts receivable financing is extremely valuable in that it enables the business owner to focus on running his or her business instead of worrying about bill collection.

  • It improves a company’s cash flow by helping to free up capital from unpaid debts. This is extremely helpful as many companies do not have the luxury of waiting to get paid because they need the cash to pay their own expenses.
  • It also takes on the customer default risk that the company would ordinarily assume.
  • It handles the collection of debts and pays back the company anything that remains after the financing amount and associated processing fees are deducted.
  • It generates credit checks and financial reports.

What is Supply Chain Financing?

Supply chain financing, also called reverse factoring, allows a supplier to sell its invoices to a bank at a discount. This enables the supplier to get its money before the buyer pays the bill. This is a good option to reduce the potential for problems with suppliers because the funding organization is dealing directly with the buyer. It is beneficial to both the buyer and supplier because it provides both with working capital.

HOW IT WORKS

Supply chain financing optimizes cash flow by allowing businesses to lengthen payment terms to suppliers while allowing the suppliers to get paid early. Unlike factoring, where the lender is dealing with multiple buyers, reverse factoring deals with just one buyer at a time. It is also less risky for the financial institution because the supplier uses the buyer’s credit rating and the invoices are already confirmed by the buyer. Supply chain financing is not a loan, just an extension of the buyer’s accounts payable. It can be tied to multiple financial institutions and works for both large and small businesses.

THE BENEFITS

Supply chain financing is a win-win proposition for the buyer, the supplier and the financial institution because it provides short-term credit to the buyer and seller.

  • The buyer maximizes its working capital, getting to hold onto its money longer
  • The supplier has additional operating cash flow and doesn’t have to wait to be paid to access it
  • The lender gets a fee for providing the financing

ExpoCredit Offers Both A/R Financing and Supply Chain Financing

ExpoCredit has a variety of accounts receivable and supply chain financing solutions to help businesses meet their short-term cash flow needs without incurring additional debt. There is no need to wait for long periods of time for payment on invoices. ExpoCredit acts as a strategic partner to create flexible, customized financial solutions that meet your specific situation and we work with you to help you overcome short-term cash flow challenges.

With ExpoCredit you can take advantage of volume discounts and credit extensions. The application process and funding after approval are quick and painless, so you can focus on running your business without worrying about how you will pay your bills.

For more information and to apply online, visit ExpoCredit at  https://www.expocredit.com

Sources: investopedia.com, lexicom.ft.com

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