A steady cash flow is a business challenge, and for start-ups, is a leading cause of early failure. Accounts receivable financing is a useful form of capital without the complexity of a business loan. Here are ‘ins and outs’ you need to know about this type of financing.
Accounts Receivable Financing Defined
This asset-based source of funds relies on receivables – the money owed by customers through invoiced transactions. The receivables become collateral in the financing agreement.
Obtaining Accounts Receivable Financing
Financial organizations known as factoring companies handle accounts receivable financing. The factoring company will advance a reduced value of receivables, usually between 70 and 90% of the total value. The factoring company will collect unpaid invoices, deduct the advance and a fee, and give you the balance of the amount collected.
When estimating your receivable’s value, the factoring company considers the following:
• Business size. Receivables from large organizations have a higher value than smaller companies and proprietorships.
• Receivables age. If you have a significant level of outstanding invoices, the factoring company may reduce the value since they’ll invest more resources trying to collect payments.
Perceived Drawbacks to Accounts Receivable Financing
Working with a factoring company will cost more than traditional financial solutions like banks. Your organization may be viewed to have poor credit or less financial stability. Industry analysts disagree, citing the use of accounts receivable financing by many successful companies to improve cash flow.
Advantages of Accounts Receivable Financing
In addition to freeing up capital held in unpaid invoices, accounts receivable financing offers these advantages:
• Quick application and approval processes, with cash available in less than one week.
• Cash flow for you, and optional extended payment terms to customers.
• Risk of customers defaulting on invoices transfers to the factoring company.
• More cash is available as your accounts receivables (and company) grows.
• Doesn’t require repayment nor reflect as debt on your balance sheet.
• Includes additional services such as new customer credit checks and preparation of company financial reports.
Contact us to learn how we can help with accounts receivable financing.