With the advent of a global pandemic, not only is personal health jeopardized, but so is the ability for many small businesses to endure amid market disruption and ongoing uncertainty. Converting assets into cash could help a business meet payroll, take advantage of trade discounts, extend credit to customers, cover expenses or fuel business sustainability.
Accounts Receivable Financing is a popular option to accelerate cash flow. Many financially sound, small- to mid-sized businesses find it to be a great tool and choose it over more traditional forms of credit because of its flexibility.
Example, a business generating $2,000,000 in gross annual sales invoices $166,000 per month. If receivables are paying in 30 days, then the business could improve its cash position by over $5,000 for every day it improves its AR turn. By obtaining cash for invoices within 24 hours, a business could replace a frozen asset on its books with a predictable source of working capital to run the business.
What is AR Financing? Simply the selling of outstanding invoices or receivables at a discount to a bank, finance or factoring company. It is an asset-based financing arrangement where a company’s receivable accounts are used as collateral in exchange for cash, bridging the gap between payables due today and receivables remitted in 30 days or more. The value assigned to the account depends upon the age of a receivable; the more current the invoice, the more value it is assigned.
How it works: The lender purchases a company’s qualifying current and future receivables at an agreed upon discount rate and immediately pays the company for all current receivables. The lender continues to pay the company for new receivables as they are generated. This greatly enhances the reliability of cash flow, effectively allowing the borrower to operate as an all cash business.
Before deciding whether AR Financing is right for your business, do your homework and explore options, including traditional lines of credit, term loans, SBA Financing and personal financing. If you decide to pursue AR Financing, carefully select your lender. The right relationship makes a huge difference when it comes to the success — or survival — of your business.
Mission Valley Bank is a locally-owned, full service community business bank headquartered in Sun Valley, California with a business banking office in Santa Clarita. Steve Nunez can be reached at (661) 753-5681. For more information visit www. MissionValleyBank.com. 
