How To Mitigate Business Risks With Your Accounts Receivables?

With daily COVID cases running near the 1-lakh mark, the government is forced to impose lockdowns and restrictions on gatherings and movement of supply chains. So, even with economic stimuli and tax provisions, the economic activity is slowing down. Policymakers are left with fewer contingency plans against another sharp economic downturn if it happens.

Risk is an unavoidable part of any business – whether a COVID-shaped global disaster is present or not. It comes in many forms, each with its unique way of leaving a devastating aftereffect. However, those doing business during a pandemic (and potential recession that may follow) need to find ways of mitigating risks actively. It is crucial not only for expansion but also for survival and financial stability during turbulent times.

Many businesses have turned towards financing their accounts receivables to have a stable cash flow during the pandemic and sustain amid fierce competition. Let’s examine how this alternative lending option can help businesses mitigate operational risks amid a pandemic.

A Brief Insight Into Financing Accounts Receivables

Essentially, accounts receivables financing refers to an arrangement between a business and a lender where the former obtains funds from the latter against approved invoices. During liquidity crunch, instant access to funds frozen in receivables stabilises cash flow and keeps daily activities running smoothly.

Financing receivables can be broadly classified as follows:

• Sale Of Receivables

In this arrangement, companies take a percentage of unpaid receivables and sell that to financiers in a virtual sale. After a time specified in the invoice, said financier will approach the customers to collect payment.

• Secured Loan

In this arrangement, businesses pledge their receivables balance as collateral to obtain a secured loan from a lender. Since the said lender does not directly approach the customers, this leaves substantial room for confidentiality. 

How Account Receivable Financing Helps Mitigate Business Risks

It is not without reason that account receivable financing has been gaining popularity in recent times. More and more companies are resorting to accounts receivables financing to meet their business requirements. Here’s how receivables financing can help mitigate business risks during a crisis.

• Quick Access To Cash During Liquidity Crunch

Unexpected expenses and late payments can end up being a major setback for businesses. Invoice financing allows you to convert the money frozen in invoices or credit sales immediately without having to nag your clients continuously for funds. The money thus obtained can be used to expand inventory, market your products, run operations, or increase the workforce.

• Collateral Free Financing Is Beneficial For Small Businesses

The eligibility criteria to obtain a business loan or working capital loan are now stricter due to the pandemic, making it difficult to obtain funds without pledging collateral. Banks and NBFCs can take several days to verify the creditworthiness of a business before extending loans.

Accounts receivables funding is an unsecured mode of financing where the funds are disbursed against an invoice. This is extremely beneficial for small businesses that may find it difficult to arrange an asset to pledge against the funds.

• Overcome The Backlog And Redesign Using High-Value Loan

Lockdowns and movement restrictions have disrupted traditional business operations, and businesses are being forced to adapt to this new normal. Brick-and-mortar stores, dependent on footfall, were among the worst affected and saw their revenue channels suffering in more ways than one.

To combat this slowing sales rate and maintain a stable cash flow, businesses need to explore alternate revenue generation streams. Funds obtained from financing the receivables can be used to shift business operations online and set up remote infrastructure, which will help overcome the slump suffered in the last few months.

• Maintain Relations With Vendor

With supply chains disrupted and funds stuck in invoices, businesses dependent on using their account receivables to pay vendors find it difficult to clear payment for orders. Not only does this hamper business operations, but it can also sour relationships that took years to set up.

By discounting invoices, you can pay for orders upfront and maintain the trust and goodwill of your vendors in difficult times. Moreover, it will also prevent outgoing costs from spiralling out of control, helping stabilise cash flow for your business.

With their innovative solutions, fintech platforms like KredX have emerged as a leader in invoice financing. Their integrated cash flow solutions improve access to financial services for individuals and businesses that are usually underserved by traditional financiers. 

In the long run, it will also help enterprises to improve their credit ratings, which will come in handy in future expansion endeavours.