Check out what prepayment of receivables is, its advantages and risks for small businesses!
Do you know what to consider when requesting an advance on receivables? This resource can be an excellent alternative for small businesses, but it requires some care. After all, we are talking about a delicate aspect for any company: financial management.
With that in mind, in this post, we will start by explaining what prepayment of receivables is and what its advantages are for small businesses. Then, let’s see what you should pay attention to before adopting this strategy. Come read!
What is prepayment of receivables?
Prepayment of receivables is a very safe practice of requesting a type of advance for sales made by your company in a given period.
So, instead of receiving the money in two months, for example, this payment is made in advance. Receivables correspond to the value of customer purchases in your store made using credit cards, installments and revolving sales.
So, even if your customers have split the purchase several times, you don’t have to wait every month to receive the full amount, and you can have access to this money even before the consumer pays for the sale.
The advance is different from the loan , because, in the latter case, the credit belongs to the bank and not yours. As for the advance, we are talking about an amount that belongs to your company, but has not yet been received.
Normally, you have to pay a fee to receive these resources, which varies depending on the financial institution. When you request an advance on receivables, this fee is already charged and the funds enter your account immediately.
Credit advance is ideal for small businesses that need resources to maintain cash flow and working capital or invest in the company.
Advantages of anticipating receivables for small businesses
Often, prepayment of receivables ends up being more advantageous for the small business than loans or other financing options, which may have high rates. This way, you reduce the company’s debt risks .
Furthermore, advance credit is a good alternative to have working capital and maintain your operations or carry out a renovation to expand your service. As a result, the resources received can be fundamental to the company’s growth at a given time.
Likewise, if you deal with purchases from suppliers very frequently in your company, credit advances can be a very useful tool to maintain your purchasing power constant throughout the month.
In emergency situations, anticipation can save your business, without harming your finances. But it is important to highlight that building an emergency reserve is one of the best options for small businesses to have sufficient resources to deal with unforeseen events.
There are some elements to look at before joining receivables anticipation . See more below!
What should you pay attention to before using receivables anticipation?
Although prepayment of receivables brings many benefits to companies, it also presents some risks. We have separated some aspects for you to keep an eye on before requesting an advance on receivables, check it out!
1. Fees
The first important point is to observe whether there is a fee for making this advance payment, the value of this fee and whether you are willing to pay it.
After all, the idea of advance credit is to free up cash and support a certain situation in your business. But you need to assess whether this is the best solution to the problem you face in the company.
So, the ideal is to talk to the financial institution and analyze the possibilities and rates available to choose the best options for your business.
2. Financial planning
Anticipating receivables may or may not become routine in your company. Just because you use it frequently doesn’t mean your business is going bad. But it is necessary to analyze whether it is really necessary.
This resource is a good solution in times of emergency, but sometimes asking for advance can always be an indication that your financial planning may have some flaws.
In any case, you can request an automatic or specific advance payment, according to your business needs. In the first case, it is a good alternative for frequent advances and to ease monthly bills.
Furthermore, it is interesting to survey your budget and identify possible bottlenecks in your financial operations.
A lack of planning in this area can compromise the evolution of your business and, therefore, you need to invest some of your time in managing your company’s expenses.
It is also essential to plan before requesting an advance on receivables and define the amount necessary to meet the demand you need.
3. Predictability in sales
Having predictability in sales is another aspect that must be linked to the anticipation of receivables.
This is because, with this forecast, you can have a perspective on the value of upcoming inflows, so as not to harm your cash flow in the future due to anticipated receivables.
The more you understand about your business, the better your strategies will be and the greater your financial control. Likewise, you will have tools to make decisions that are best suited to your reality, including when requesting an advance on receivables.
