Accounts Receivable Financing is a tried-and-true source of working capital that improves cash flow and helps companies meet their expected — and unexpected — expenses.
Accounts receivable financing enables a business to sell their unpaid invoices at a discount in return for immediate cash. This no-debt funding alternative is often used in place of bank loans and can be less expensive than borrowing form online lenders.
Rather than waiting weeks and months on your customers to pay their invoices, you can turn the potential revenue sitting in your stack of accounts receivable into cash in your pocket. Every day, thousands of businesses work with factoring companies that purchase their accounts receivable and pay them the majority of the balance of those invoices right away. This is not a loan; this is a purchase of your invoices. That means, no debt to repay.
How Accounts Receivable Financing Works
When you partner with a factoring company, you will be able to sell your invoices that are due 30, 60 or even 90 days in the future. The factoring company will advance you money that is due to you within 24 hours of submitting an approved invoice. The funds are usually deposited by wire transfer or direct deposits. That is your money; you can spend it however you’d like — payroll, investments, operation costs.
Businesses of all sizes use accounts receivable financing to maintain steady revenue before their customers pay their bills. If your cash is tied up in your accounts receivable, and you would prefer to have that money now, accounts receivable financing is an alternative funding option worth exploring, especially if you want to avoid the high interest rates of online lenders and merchant cash advance sites and seemingly endless debt cycles.
Accounts receivable financing, or invoice factoring as its also know, is the process of selling unpaid invoices at a discount in return for immediate funds. Invoice factoring is different from invoice discounting when a business takes out a loan using their invoices as collateral and pays a set finance rate rather than a percentage of the invoices.
Accounts Receivable Financing Steps:
- You provide a service or product to your customer
- You submit your invoice for that customer to your factoring company
- Your factoring company advances you a percentage of that invoice
- Your factoring company collects on that invoice from your customer
- You receive the balance of the invoice, minus a small factoring fee
The funding process is easy and fast. When a business owner works with a factoring company, the approval process is also fast. Clients with creditworthy customers can be accepted for accounts receivable financing within a couple business days at some factoring companies.
The Benefits of Accounts Receivable Financing
As a businessperson, you know how important it is to have cash on hand to pay your employees, vendor bills, rent, utilities, and everything else you need to keep your business going. When you speed up your cash flow through accounts receivable financing, you gain the peace of mind that you can pay bills on time and not worry about paying off another loan.
Here’s a quick look at a few of the benefits of Accounts Receivable Financing that could come with factoring at a top-tier factoring company:
- Expedited cash flow
- Low factoring fees and high advance rates
- No debt added to your balance sheet
- Fast and friendly customer service
- Professional credit checks and collections
- 24/7 online access to all paperwork and reports
- Improved credit score potential for on-time payment of bills
- Payment by ACH or Wire
Accounts Receivable Financing Process
The accounts receivable financing process is simple. Based on a variety of factors like your eligibility, your customers’ track records, and the amount of invoices, you will receive a specific factoring rate from the factoring company.
Once you submit your invoices, most factoring firms will pay you within days. Your customers typically will have to pay within 90 days, otherwise the debt reverts to you and you must pay back the factoring company the advance you received on that invoice. This is what’s known as a recourse factoring agreement. Be sure to know the terms of your factoring agreement before signing your contract.
The financing you receive from factoring invoices can be used toward covering bills, buying new equipment and growing your business. Factoring companies place no restrictions on how you use your advance. You can factor as many invoices as you want, and can continue to factor invoices for as long as you wish.
Not only does this type of financing improve your cash flow, but it also gives you the flexibility to take on larger customers with longer payment schedules and take advantage of early payment or volume discounts.
Accounts Receivable Financing vs. Bank Loans
Financing accounts receivable can be especially beneficial to businesses that are unable to get bank loans because of their credit score and lack of collateral. Factoring companies consider your customers’ credit worthiness – not your payment history. Here are some key differences:
|Bank loans||Accounts Receivable Financing programs|
| – Take a long time for approval |
– Need collateral to guarantee the loan
– Require an established credit history
|– Can approve you within a few days |
– Do not require collateral
– Consider your customers’ credit history, not yours
| – Adds debt to your balance sheet and another payment to meet |
– Require repayment out of unknown projected earnings
|– Do not incur debt: you are not borrowing money |
– Send you cash advances on what you’ve earned, not what you might earn
|– No additional services are offered by banks||– Factoring companies offer their accounts receivable financing clients value-added services such as professional collections, credit screening of new customers, extensive online recordkeeping, optional invoice preparation, and more|
Financing your Accounts Receivable
Financing your accounts receivable can happen in a few days, not a few months. A factoring company will get you started with a customized factoring rate quote. From rate quote to application and funding, the whole process can take less than a week. Then, after that first funding, your next fundings will only take up to 24 hours.
Is Accounts Receivable Financing Right for your Business?
If you run a business-to-business company and work with customers who take 30, 60 or even 90 days to process payments, then accounts receivable financing may be a viable funding source for you. If you primarily have international customers or the majority of your customers have questionable credit scores, then factoring is unlikely to be a realistic option.