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3 Ways to Use Accounts Receivable as Collateral to Secure a Business Line of Credit

In the final installment of our accounts receivable blog series, we will show you how to use accounts receivable to secure a business line of credit. It might be just the answer you are looking for.

Why Accounts Receivable?

One of the most common reasons small businesses fail is cash flow issues. This is a challenge for many startups and growing companies but it’s a challenge you can easily overcome with the right funding solution. Using your accounts receivable as collateral can help you secure funding. This form of collateral works well for different types of financing solutions, including:

  • Asset Based Loans
  • Commercial Lines of Credit
  • Accounts Receivable Factoring

Instead of waiting 30-90 days for payments, use your collateral to get the cash you need to run your business now. The invoices must be of high quality, meaning your invoicing practices are effective. Your client must also have good credit.

Three Ways to Get Funding

With accounts receivable funding, you are either selling your right to stake a claim on the cash payments in exchange for immediate funding or you are obtaining a loan against unpaid invoices. Let’s look deeper at three business funding programs that allow you to sell or borrow against your accounts receivable.

1. Asset-Based Loans

Asset-based lending allows you to use your receivables as collateral to secure a business line of credit. With this type of loan, your receivables, machinery, inventory, real estate, artwork, and other assets help you to qualify. This loan acts like a business line of credit. You draw from this line when needed to cover cash flow issues. As the invoices are paid by your clients, you pay down or off the balance of the loan. Asset-based loans are commonly used by businesses that have outgrown factoring solutions. Yet, they still don’t qualify for lines of credit from conventional lenders. Minimum monthly sales are required (typically $1 million).

2. Commercial Lines of Credit

With a commercial line of credit, the lender provides you with a pre-set credit limit–much like a credit card. You can withdraw cash as you need it as long as it’s up to the amount of the credit line. As your cash flow increases, simply pay down or pay off the debt. The problem with this business funding solution is that most lenders don’t allow you to secure the loan using accounts receivable alone. Often, they require other forms of collateral as well because the value of the unpaid invoices may fluctuate below the credit limit. This leaves the loan under-collateralized, which banks try to avoid. Commercial lines of credit are very simple to use. They are also very flexible. However, they are extremely difficult to qualify for, especially if your business is a startup or is struggling financially. The company must show a long history of profits and effective management practices. An SBA lending strategist will work with you to help get your application in order.

3. Accounts Receivable Factoring

Accounts receivable funding allows you to get the capital you need without providing extra collateral. This form of business financing acts much like a revolving line of credit for your company. You sell your accounts receivable to a lender known as a factoring company. In return, you get cash immediately. Some companies use accounts receivable factoring for one-time emergencies or growth projects. Others commonly use this solution regularly, such as weekly or monthly. This allows companies to keep their cash flows steady at all times. Funds are used for growth, daily operations, special projects, and more. Since this “revolving line of credit” is tied to your receivables, as your sales increase, so does your factoring limit. Luckily, the size of the company doesn’t matter. From startups to growing small businesses, as long as your clients are reputable, you can qualify for accounts receivable factoring.

Is Accounts Receivable Funding the Right Solution for Your Business?

Your business may qualify for one or all three of these business financing options, but not every solution is best for every company. Here are some factors you should examine when deciding between business funding solutions:

  • How many years has the company been in operation?
  • What are the current conditions of your company’s financial statements?     
  • Is your company a startup, an in-the-growth phase, or a matured business?

Established businesses with good financial history and moderate growth have more options. These companies may qualify for business lines of credit, which come with better rates. For startups bringing in under $1 million per month in sales, accounts receivable financing is the most realistic solution for you. However, if your financial statements are in order, and your sales generate over $1million per month, an asset-based loan is a better option. If your small business is growing fast, accounts receivable factoring may be the best route if you don’t have other assets to use as collateral. Your line of credit increases as your sales increase, giving you more and more room for growth.

Benefits of Accounts Receivable Factoring

According to a recent Main Street business lending trend report, borrowing slowed down by 9.7% between November and December 2018. Between December 2017 and December 2018, PayNet’s Small Business Lending Index also dropped by 7%. This represents a year-over-year decline. Small business loans promote corporate growth as well as overall economic confidence. Some experts believe this decline is related to small business owners losing faith in the lending system. Owners have no confidence in their ability to secure financing from lenders so they simply don’t try. Traditional business loans are not within reach for startups and growing small businesses. These financing sources are inadequate options for companies without collateral or assets. But many owners understand the value of financing to secure cash flow and grow their brands. Receivables financing provides capital to these owners, offering a financing solution they qualify for–without collateral.

Three Advantages of Accounts Receivable Loans

For businesses in financial need, the benefits of accounts receivable funding can be irresistible. The idea of getting cash immediately equates to a fighting chance for many growing companies. Here are the three main advantages of these types of lending solutions:

  1. No Collateral Required – Your funding is secured by your unpaid customer invoices. So, no other assets or collateral are required by the factoring lender.
  2. Fast Cash – The approval process is quick. As soon as you’re approved, the cash is in your account in a matter of days.
  3. Business Ownership Retained – You don’t have to put your business up as collateral or sell pieces of the ownership to acquire financing.

Don’t let cash flow issues force your startup to fail.  Secure the financing you need from an accounts receivable loan and remain in business against your more established competitors.