Last updated 4/8/2021
As COVID-19 continues to disrupt the world as we know it, many companies are facing a liquidity crisis and scrambling for cash. To keep it flowing, business owners are turning to a classic and time-tested financing solution amid the COVID-19 pandemic: A/R financing.
1. Why is accounts receivable (A/R) financing an attractive option amid the COVID-19 pandemic?
A/R financing is a very simple, straightforward financing solution that is beneficial to companies in times when the economy is challenging, as well as when the economy is growing. The basis of A/R financing is to accelerate payment of invoices for immediate cash. Waiting 60 or 90 days to collect invoices can be an issue when payroll is due weekly, or when vendors require 30-day terms.
Unlike a loan, A/R financing is based on whether a company can deliver a product or service, as well as the credit of the paying customer. If both parameters are satisfactory to the finance company, the business should qualify for A/R financing. Finance companies are less concerned about time in business, balance sheet strength, earnings, cash flow forecasts, etc. These are all the items banks need in order to provide loans, which can be difficult to obtain in the current economic climate.
2. How can companies that already have financing from a traditional lender utilize A/R financing?
A/R financing complements an existing bank line and can increase working capital. For example, a company’s sales begin to increase but their bank line is capped at a lower amount than what they need to borrow. The company can work with their bank to get authorization to select a specific customer and finance just the invoices to that customer with a finance company.
A company may also have an equipment loan or small personal loan with a traditional lender, but due to lower earnings or limited time in business, the company cannot get a working capital loan to address new sales. Since A/R financing is based on customer credit strength and ability of the company to deliver product or services, they are a perfect candidate for A/R financing.
3. How can A/R financing be customized to help a company through specific needs during these challenging times?
In times of economic uncertainty, companies may find their bank not willing to extend credit. This could result in lines of credit being put on hold, getting reduced, or even forced to be repaid. I have helped companies in all these scenarios obtain the financing needed to continue their business.
One example was a staffing company that had a line of credit, but as sales slowed due to economic shutdowns, their current lender decided to exit the loan. The company was deemed an essential business and sales restarted within weeks of the initial shutdown. They needed A/R financing to make payroll and continue operating post-crisis.
4. Is A/R financing an option for companies that do not qualify for federal stimulus programs?
Yes. We have clients using A/R financing who have qualified for federal programs amid the COVID-19 pandemic and some who were unable to obtain stimulus loans. The federal loans give companies the flexibility to retain staff and make payroll when sales are soft. As sales return, companies can use A/R to finance these new sales and continue the growth trajectory they were on prior to the shutdown.
5. How does the cost of A/R financing compare to a traditional loan?
If a company is ok with the restrictions of traditional bank loans, it is usually lower cost. Many times, companies want the flexibility, less restrictions, and added benefits that come with A/R financing so they are willing to pay a bit more for the additional value. Companies we talk with are willing to give early payment invoice discounts to customers in order to receive immediate cash. A/R financing is essentially the same or even less expensive. With A/R financing, you don’t need to bother your customer to pay you early and you begin a relationship with a finance company who can become a trusted partner into the future.