How to Combine Inventory and Accounts Receivable Financing
Cash strapped companies often look to asset financing to help them get back on track with cash flow management, because asset financing typically allows you to get fast approvals on short-term financing that has advantages over unsecured options. When it comes to asset financing, accounts receivable financing tends to be the most popular and well-known. In part, this is because it is one of the oldest forms of commercial financing in existence. It has been used since at least the middle ages, and it works across practically any industry.
The key to financing receivables is that you are gaining access to a cash advance against money that is owed you already, so it doesn’t add to your long-term debt overhead. The structure of these advances also makes your customers’ credit more important to the transaction than your own. Of course, no method of financing is without risks. While financing receivables might be done with no recourse in the event a customer fails to pay, fees and penalties are designed to help offset the costs when that happens, so your customers that are more likely to pay late or not at all will be more expensive to finance.
Sometimes, accounts receivable financing is not enough on its own. Many companies also employ inventory financing to get working capital, but there are several drawbacks. Inventory financing tends to be based on the forced liquidation value of goods, which is lower by far than the market value. It also requires regular diligence to confirm the quality and quantity of the collateral. Inventory financing can be made more effective by combining it with accounts receivable financing into a new product that companies can use to comprehensively finance their assets.
Usually, this kind of financing is called supplier-line financing, and it allows you to get trade credit to use when you need to pay suppliers and contractors. It’s based on an ongoing monitoring of your inventory and receivables, and its flexibility allows you to avoid the drawbacks of either form of financing to get more working capital for your cash flow management needs.
If you have a monthly income above $1 million, your company might also qualify for asset financing, which combines inventory, accounts receivable financing, and equipment financing into one consolidated credit management tool. If your company would benefit from that kind of bundling, you need to contact an asset lending provider to talk about your options and your business cycle. That way, you can empower your business to keep growing.
