Why AR Finance is a Good Option When Your Bank Says “Go Fund Yourself”

Getting business funding right now can be tricky: Banks have turned inward, focusing more on treasury management and deposits than lending. We have seen a decreased appetite for risk and increased instances of banks asking companies to exit lines of credit – or worse, banks leaving companies in limbo somewhere between not fundable but not yet in turnaround or workout.

So what can businesses do to survive when traditional financing options seemingly dry up?

For many companies, the answer is accounts receivable (AR) finance. AR finance provides a valuable way for businesses to access working capital quickly by leveraging their outstanding invoices for on-demand payments.

AR finance has been a hallmark of LSQ’s business for our nearly 30-year history. In fact, until 5 years ago, AR finance, bundled with credit and collections management, was our only business. What we’ve learned in those three decades is that AR finance’s value is amplified during an economic downturn for a variety of reasons:  

Improved Cash Flow

Economic downturns often lead to delayed customer payments and reduced sales, affecting a company’s cash flow. AR finance allows businesses to convert their unpaid invoices into immediate cash, providing the liquidity needed to cover operating expenses, pay suppliers, and manage day-to-day operations. 

Another important factor with cash flow from AR finance is that it doesn’t add to future liabilities. By selling invoices to LSQ, you are not creating new debt that can lead to liquidity constraints down the road.

Mitigating the Impact of Slow Payments

Harsh economic conditions can lead to both upstream and downstream issues, including delays in getting paid. What was once 30-day terms can easily become 30 or 45. In other words, your customers’ cash-flow challenges become your cash-flow challenges. 

By offering quick access to funds, LSQ bridges this gap by advancing funds – up to 90 percent of invoice value – as early as the next day after a payment request in LSQ FastTrack, reducing the impact of slow-paying customers. (The invoice balance, minus our fee, is paid to you when your customer pays LSQ for the invoice.)

Flexibility in Usage

Over the years, we have heard clients bemoan the fees, covenants, and restrictions of traditional bank credit offerings. And rightly so. Oftentimes, there are minimum usage requirements (you’re paying for money you’re not using). Banks are also very sensitive to debtor concentrations; they will limit the amount of funds they offer based on how much of your business is with a single client or a small handful of clients. These fees, restrictions, and covenants become much more onerous in economic downturns.

LSQ AR finance comes with no minimum usage requirements for the amount of funds employed at any given time. We also work closely with our clients to create options that address high debtor concentrations and place few – if any – restrictions on how their funding can be used.

Risk Mitigation

With troubled economic conditions comes a greater risk of defaults and bankruptcies. So what happens if your customer goes under, leaving you holding the bag on a pile of unpaid invoices? Mitigating this risk is one of LSQ’s strong points. We offer comprehensive credit and risk management services through our proprietary credit engine that monitors the health of your customers as indicated through their payment behavior. We then provide recommendations on the level of exposure that is prudent with individual customers and across your entire sales portfolio. 

The goal is to ensure your business continuity and lessen the blow if a customer – or customers – become insolvent.

By supporting working capital needs, AR finance contributes to the survival and resilience of businesses during challenging economic conditions. LSQ AR finance solutions can help businesses of all sizes and stages solve for high growth, challenged credits, tripped covenants, high debtor concentrations, and bankruptcies in any environment. To learn more about our AR finance solutions, reach out and we will be glad to talk about partnering with your business to help navigate the current climate.

Be on the lookout for part two of this blog series where we will discuss how AR finance is a good option if your business is on the other end of the financial spectrum. Working capital isn’t only a necessity when your business is trying to survive, but is also critical when it’s time to grow.