Why You Might Want to Say NO to Accounts Receivable Financing

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As a small or mid-sized business owner, you probably rely on an innate healthy skepticism when you come across sales pitches or ideas that seem a “little too-good-to-be-true”. As they say, if it looks like a duck, and it quacks like a duck… 

Well, one such potential duck that you may want to duck (as in dodge, avoid, steer clear of, or just plain run as fast as you can in the other direction) is a business financing vehicle known as accounts receivable financing.

What is Accounts Receivable Financing?

Simply put, accounts receivable financing – which is also called factoring — is when you sell some or all of your outstanding invoices to a third party in exchange for cash that you can use in the short-term.

On the surface, this seems like a pretty straightforward arrangement. And for some businesses, it could frankly be a good move. However, as we’ve seen over the years and heard from countless small and mid-sized business owners, it’s definitely NOT the right business financing solution for everyone. Here are the 4 key reasons why:

1. The optics are lousy.

Your customers may be confused or even alarmed that instead of paying you, they’re being contacted by a company they’ve never heard of and asked to send a check or make an online payment. Even if your business isn’t in financial trouble, it can look that way – and it can cause some customers to lose confidence in your business.

2. The tactics may be lousier.

When dealing with a customer who is behind on their payment, you have to balance firmness with the fact that, for the moment at least, you want them to remain a customer. And so you’ll likely wait as long as you can before you start playing “hardball”. But the third party company that you sold your invoices to has no obligation to maintain the relationship between you and your customer. If they think that threatening your customer with collection or legal action is the right move, then that’s what they’ll do. If it means you lose that customer, then that’s your problem — not theirs.

3. The purchaser may stop purchasing.

There’s no guarantee that the third party who purchases your accounts receivables today will continue doing so into the future. That may be the plan and the intent; but things can change without warning. For example, the company may change its policies and your costs may skyrocket, making the arrangement prohibitive.

4. The agreements can be excessively complex.

If you thought the terms and conditions of a conventional bank loan were convoluted, then watch out: they’re a walk in the part compared to typical agreements involving the sale of accounts payables. Any deviation of a myriad of highly complex rules could trigger penalties, and could even lead to litigation. Having a lawyer examine any contract and translate the rules from legalese to plain English is an absolute must!

Working Capital Loans: A Welcome Alternative to Accounts Receivable Financing

If you need to increase your cash-on-hand – either to cover an expense or take advantage of a great time-limited opportunity – then instead of selling your accounts receivables and exposing yourself to these risks, you may find it far more beneficial to get a working capital loan instead.

With a working capital loan, you do not need to provide any collateral; and this includes your accounts receivables. What’s more, the agreement is straightforward, and you’re free to pay the borrowed funds back early in order to save interest costs (though there’s no obligation to do so). You can also use the funds for any purpose that you wish, without seeking our approval or opinion.

Call Mulligan Funding at 855-326-3564 to discuss your financing options today!

The information shared is intended to be used for informational purposes only and you should independently research and verify.

Note: Prior to January 23, 2020, Mulligan Funding operated solely as a direct lender, originating all of its own loans and Merchant Cash Advance contracts. From that date onwards, the majority of funding offered by Mulligan Funding will be by Loans originated by FinWise Bank, a Utah-chartered Bank, pursuant to a Loan Program conducted jointly by Mulligan Funding and FinWise Bank.