Great for —

• Businesses are able to realize the benefits of revenue while waiting for customer payments to come in. This can be especially helpful in companies that have large customer payments or lumpy revenue.

• Companies with high quality customers are able to use those relationships to access funding with business history and other traditional factors are lacking to obtain traditional bank debt.

• These are typically structured as lines of credit and can be advantageous to businesses because it can be borrowed and paid back when needed. Companies won’t pay any interest if there isn’t anything borrowed on the line of credit. 

Things to Watch Out For —

• These loans almost always require an audit or exam of the accounts receivable to ensure accuracy of accounting and eligibility. Lenders will require the company to pay for a third party to perform these services. Many times audits of accounts receivables can be done virtually to reduce costs. 

• These loans typically have a formula that will specify how much can be borrowed. Lenders typically won’t lend on customer accounts that are significantly past due, in higher risk foreign countries, or have other risk factors. It will be important to make sure the formula works for your business and gives you adequate funds for the cost.

• On lines of credit, lenders might try to charge a fee if you are not using the line of credit. If you are expecting to use this seasonally or only as a safety net, you will want to look at the unused line fee to make sure you aren’t paying a high cost for something that might not be used often.