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 what we sometimes call invoice factoring is a form of funding. The company gets paid for all the outstanding invoices right away. So, they do not need to wait 30, 60 or 90 days for payments.
Through invoice factoring, one essentially sells outstanding invoices after approaching an accounts receivable factoring company.
The financing company also known as a factor will receive money from the customers. The risk of collection is also carried by the factor.
How does Receivable Financing work?
Let me explain it to you with an example.
Say you have $100,000 worth of outstanding invoices with a 60 day term. Like any other business owner, it is very difficult for you to collect payments of outstanding invoices. But, getting behind on cash flow is even more trouble.
To take the unpaid invoice off your hands, you would approach accounts receivable factoring company.
The 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.
Additionally, the lender also charges you a processing fee which can be anywhere between 1% – 5% depending on the amount of funding.
Once the payment is 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. You can cover all of your cash flow gaps caused by slow paying customers.
Easy Approval – Factoring companies usually provide working capital to businesses who have been refused a bank loan. Invoice factoring companies typically only care about the value of the invoices you are looking to factor, as well as the creditworthiness of the customers.
Solved Cash Flow Problem – You are never short of cash and can invest freely into growth and hiring.
Outsourced Invoice Collection – The ability to outsource invoice collection can be a big advantage for all business owners. If a factoring company takes over the collection of your accounts receivables, you can 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 about a business including its size, turnover, and its client profile. This information gathering is typically done online, over the phone or even face to face if they happen to be situated in the area.
Once a Factoring broker has all the information they need they will set about referring customers to lenders which are best suited to fulfill their requirements and generate quotes.
Once the quotes are received it’s the role of a Factoring broker to discuss and explain which particular lenders would be the ones most suitable to help. The broker’s knowledge of the market and the individual lenders’ strengths and weaknesses put them in the perfect position to achieve this.
How is Accounts Receivable Factoring different from Invoice Financing?
Invoice financing is another way to get cash right away for your unpaid invoices. Invoice factoring and invoice financing are often considered the same thing, but they’re actually different types of business financing.
Whereas invoice factoring companies want to buy your outstanding invoices, invoice financing companies want to advance you a certain amount of cash, based on the value of your receivables. Once your customers pay up, you pay back your loan, plus fees and interest. Invoice financing companies don’t take on the debt or responsibility for collecting the invoices.
One of the most often recognized benefits of utilizing a bank line of credit, as opposed to invoice factoring, is that the bank line will be more cost effective.
Traditional banks have a much lower cost of funds than most factoring companies, which means they are able to lend their money to borrowers at cheaper rates. Additionally, banks do not provide any of the back office support functions that factoring companies offers, which allows the banks to charge less for their financial services.
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 line for the necessary amount, then this may very well be the appropriate financial decision to select.
However, if your situation is not so straight forward, a factoring company may be able to provide you with the services necessary to facilitate your growth and success.