If you own a business and are looking for ways to finance an expansion or other business expense, you may have considered accounts receivable financing. This type of financing involves the sale of your outstanding invoices, or accounts receivables. You receive instant cash for a fee or discount on these accounts. These are some things you should know about this type of funding.

Traditional Factoring Options

If you pursue traditional factoring, you actually sell your accounts receivable to a funding organization. You will not receive the full amount of your outstanding invoices from the factor. You will also pay processing fees to complete the process. You can choose which receivables you will sell, but you can’t typically sell those that are past due or defaulted. The characteristics of the receivables, e.g., if they are for small, new or large businesses, will determine your sales amount.

In addition, some factoring deals involve putting your outstanding invoices up for collateral, so they aren’t actually sold, but they are used to determine lines of credit. These are loans that must be paid back. Be aware that any factored receivables you have will show up as outstanding debt on your balance sheet.

Asset-Based Financing

You can also seek asset-based lending financing. In this scenario, you can use any of your company assets, from current assets like your accounts receivables to fixed assets like your building and property, to procure a loan. You typically receive a business line of credit based on the assets listed on your balance sheet. However, these funding options typically have very high fees. In addition, only selected accounts receivables can be used as collateral.

How Selective Receivables Work

If you want to choose what accounts receivables you use to gain financing, you may select this option. You can actually receive the full amount of your outstanding invoices in advance when you choose selective receivables financing. You should also receive a lower interest rate, and your balance sheet won’t show this type of funding as debt if it is structured properly. Therefore, your debt ratio and other financing is not affected by this funding source.

If you choose the selective receivables financing option, you typically have access to multiple funders, so the risk is reduced for each financier. In addition, this funding option is flexible because you choose when you want to sell your accounts for advanced payment and when you want to hold onto them. This is especially valuable for seasonal businesses or during times of high economic volatility.

As you research your different accounts receivable financing options, consider how each will affect your business, balance sheet and budget. Then, make the best decision for your company.