While they may feel like a liability to you as a business owner, receivables serve as a form of hard collateral that a lender ultimately views as an asset on your balance sheet. So if your business is owed money by other businesses for products or services that you've already shipped or served, you'll have an easier time borrowing money than if you don't have these I.O.U.s.

With a receivable financing arrangement, also called factoring, your company can use the money it's owed by customers as collateral in a loan agreement with a financial firm. You can then receive a sum of money worth slightly less than the receivables pledged until you've collected the money is collected from your customers.

Factoring Facts

The risks associated with a tight cash flow, then, are transferred to the financing company. You can keep operations going and move ahead with day-to-day business activities without having to waste time chasing down customers with unpaid invoices and tying up your capital in accounts receivables.

If you're a less-established entrepreneur, factoring can be especially useful as a stopgap to receive relatively quick financing that may work as a bridge to more traditional bank loans in the future.

There are a few caveats.

1. The money owed to you needs to be from another business; it can't be money owed from another individual.

2. The lenders will look at the credit-worthiness of the businesses that owe you money, and this will influence the financing agreement. For example, if you're owed money by a large, well-known company, the asset will have a much stronger value than if you are owed money by the local bakery down the street.

3. The fees and charges for outsourcing your accounts receivable management are generally around 2 percent a month. While this may not seem like a lot in the short term, consider how the costs can add up over the lifetime of the agreement and how they compare to cash advance loans.

Those unpaid invoices don't have to be a liability. If you're looking for quick financing, factoring may be the solution.

Editor's Note: Looking for Collection Agencies for your company? If you would like information to help you choose the one that's right for you, use the questionnaire below to have our partner, BuyerZone, provide you with information for free:

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