W
could use
other people’s
money to unlock
your dormant assets,
placing it on the compound
growth curve and
paying only simple interest
– and at the same
time protect your business
from creditors and
lawsuits?
Why wouldn’t you use
it?
Every day, businesses across the country generate
accounts receivable balances by selling goods and services
to their customers.
The seemingly immeasurable value of accounts
receivable is consistently generated and replenished on
the business’ balance sheets.
The challenge the business faces is that these balances
normally do not appreciate and sometimes take
a long time to collect. An innovative financial strategy
may be available to use this ubiquitous business asset
to produce significant opportunities for business
owners.
This concept uses other people’s money without
interrupting the flow of accounts receivable.While this
was originally designed to work with physicians who
typically carry large medical receivables, it has now
evolved to work with most business owners.
The strategy is called accounts receivable financing.
Banks or other lending sources may loan the business
money based on its annual average accounts receivable
balance. This is not to be confused with factoring or
selling your accounts receivable balances, which can
result in losing control or a reduced value of the receivables.
With accounts receivable financing, normally a simple
interest payment is made on this loan. The business
owner can use this money as a bonus for himself or to
other key employees and purchase a financial product
that will grow on the compound growth curve.
A misunderstanding people have is thinking the
simple interest loan rates may exceed the return crediting
rate which could eliminate the value of this program.
The reality is that due to the effects of compounding,
the program can still produce significant positive
cash accumulation over time, even in an inverted interest
rate environment.
If you compare past history, when loan interest rates
climb, normally the crediting rates of a well-positioned
asset will increase proportionally. This increases the
value of compounding interest. The longer this interest
rate arbitrage is in place, the greater the growth in
the spread.
A few examples of businesses that have benefited
from accounts receivable financing include accounting
firms, chiropractors, consulting firms, law firms, dentists,
engineering firms, funeral homes (pre-need),
auto dealerships, manufacturers and physicians.
Not all companies will benefit or qualify for this
program, so it’s important to work with a CPA and
financial adviser. The ideal candidates are businesses
who have strong cash flow and have a need to fund
their retirement or want to offer executive benefits to
key employees.
Other strategies are business buy/sell agreements
and business succession planning.
