Does your company need working capital, but your customers won’t pay until later? Did the bank just refuse you a loan? Accounts Receivable Financing is one solution for your cash flow issues. With AR Financing you can turn unpaid invoices into cash quickly.
Sometimes it takes less that 24 hours. Yes, less than 24 hours.
What is Accounts Receivable Financing?
Accounts receivable financing, or invoice factoring, is an alternative form of commercial finance that provides fast working capital to business owners.
It uses accounts receivable as a basis for financing, providing users with a fast and predictable cash flow. Factoring helps business owners smooth out cash flow mismatches, enabling them to focus on their core business without being weighed down by continual short-term funding constraints.
How does Accounts Receivable Financing Work?
Accounts receivable financing works by collecting a company’s receivables as collateral in a financing agreement.
Say you have $100,000 worth of outstanding invoices with a 60 day term. Like any other business owner, collecting payments from outstanding invoices and getting behind on a stable cash flow is a problem.
To take the unpaid invoice off your hands, you would approach an accounts receivable factoring company.
The factoring company would finance 85% (the % may change across transactions) of the invoice and hold the remaining 15%, meaning you’ll see $85,000 in your bank account.
The factoring company will typically charge you a processing fee that can be anywhere between 1% – 5% depending on the amount of funding.
Once payments are made by customers, the lender returns the remaining $15,000 after deducting the fees if not charged upfront.
Advantages of Accounts Receivable Financing
Benefits of Accounts Receivable Financing are many, here are the top 4.
Quick Cash – Access to working capital immediately. AR financing allows you to cover all cash flow gaps that have been caused by slow paying customers.
Easy Approval – Factoring companies usually provide working capital to businesses who have been refused a bank loan or have little to no credit history. Luckily, invoice factoring companies typically focus on a the value of the invoices you are looking to factor, as well as the creditworthiness of your customers.
Solved Cash Flow Problem -AR financing provides you with a steady cash flow, allowing you to invest freely into your company.
Outsourced Invoice Collection – AR financing allows you to focus on other parts of business that are more important to your success.
If you just made up your mind to leverage AR Financing, any company with a B2B model can take advantage of it.
As a good practice, though, make sure you ask the factoring company what their experience is working with your type of business.
Role of Brokers in Accounts Receivable Financing
As a first step, a broker will gather information from the business, including its size, turnover, and its client profile. This step can be done online, over the phone, or even face to face if possible.
Once all the information has been gathered, the broker will start referring customers to those lenders that are best suited to fulfill their requirements and generate quotes.
Once the quotes are received, it’s the role of the factoring broker to discuss and explain which particular lender/s would be the most suitable. The broker’s knowledge of the market and the individual lenders’ strengths and weaknesses put them in the perfect position to provide these insights.
How is Accounts Receivable Factoring Different from Invoice Financing?
Although invoice factoring and invoice financing are often considered the same thing, they’re actually two different types of financing.
Whereas invoice factoring companies aim to purchase outstanding invoices, invoice financing companies focus on advancing the business a certain amount of cash, based on the value of their receivables. Once customers pay up, the business pays back their loan, plus fees and interest. Another difference is that invoice financing companies don’t take on the debt or responsibility for collecting invoices.
The benefit of utilizing a traditional bank loan is that they are considered to be a cost effective form of lending. Because banks do not provide any back office support, they may be able to charge less for financial services. AR financing is can also be cost effective, while providing a cohesive support system for those who utilize it.s of utilizing a bank line of credit, as opposed to invoice factoring, is that the bank line will be more cost effective.
If your business is in a position where the only need is a line of credit, and a bank is able to approve your business for the necessary amount, then this may be the appropriate form of financing to select.
However, if your situation is more complicated, a factoring company may be able to provide you with the necessary services to facilitate your growth and success.