Are unpaid invoices causing cash flow issues in your business? Consider accounts receivable financing to turn those outstanding balances into cash. This form of business financing comes at a cost but helps keep your company afloat and running smoothly.
Accounts Receivable Financing: Overview
Accounts receivable financing involves converting your unpaid invoices into cash to access your needed capital. It’s a form of asset-based financing, and you may be able to receive an advance for up to 100 percent of the amount you owe in exchange for a fee that’s assessed by the lender until the customer pays the invoice.
Facts You Should Know About Accounts Receivable Financing
Here’s what you need to know about accounts receivable financing to decide if it’s ideal for your business.
1. How Accounts Receivable Financing Works
Before applying, select the outstanding invoices you’d like to receive advances on. Once you’ve completed this first step, do the following:
- Research accounts receivable financing companies and submits a formal application with the one you select. It’s also helpful to reach out to the lender and inquire about any documentation they’ll need to process your application. That way, you can avoid hiccups and delays during the review process.
- Get approved and choose the percentage of the invoice you’d like the financing company to advance – most offer between 80 and 100 percent of the invoice value.
- Receive your advance and use it as you see fit to cover business expenses. Be sure you’re familiar with the financing company’s fees and make every effort to repay as soon as possible to keep borrowing costs down.
- Remit the weekly fee to the financing company until the invoice is paid in full to the lender. Most accounts receivable financing companies make automatic payment withdrawals to cover their fees from your business bank account.
If you requested an advance below 100 percent, you’d receive the amount you’re owed from the financing company minus any other fees when the invoice is paid. But if the customer never pays what’s owed, you’ll need to work directly with the lender to settle the outstanding balance in a timely manner.
2. How It Differs from Invoice Factoring
Invoice factoring involves the sale of your receivables to a lender. You can generally get between 80 and 90 percent of the invoices’ face value, but unlike accounts receivable financing, the responsibility for collecting what’s owed falls on the financing company. So, if the customer refuses to pay what’s owed, you won’t be on the hook for the loss.
3. Types of Accounts Receivable Financing
There are four common types of accounts receivable financing – factoring, inventory financing, purchase order financing and single invoice factoring.
4. Requirements for Accounts Receivable Financing
It varies by lender. Most have minimum annual gross sales requirements, credit scores and time in business requirements. But what’s most important is the creditworthiness of the company that owes you money, as it determines the likelihood of the invoice being paid. So, even if you have less than perfect credit, you could be eligible for this form of financing.
5. Pros and Cons of Accounts Receivable Financing
Understanding the benefits and drawbacks of accounts receivable financing will help you decide how to move forward.
Here are some key advantages of this form of financing:
- You can avoid cash flow issues.
- You could be eligible with a lower credit score.
- You won’t have to put up additional collateral since invoices are used for this purpose.
- The application process is relatively simple with most financing companies.
- You could get access to the funds in just a few business days.
Below are some drawbacks worth considering:
- The borrowing costs are often higher than what you’ll find with other forms of business financing solutions.
- You’ll pay a weekly fee as long as the invoice remains outstanding.
- The amount of interest you’ll pay is based on the customer’s creditworthiness.
- You’ll be on the hook for the balance if the customer doesn’t pay.
- You may not be able to advance 100 percent of the invoice amount.
6. How Accounts Receivable Financing Can Help Your Business
Ultimately, earnings are the lifeblood of your business. But when customers don’t remit payment on time, you may have to dip into your reserves to keep your company moving forward. However, once reserves are depleted, you risk having to shut your doors due to cash flow issues.
That’s where accounts receivable financing comes in. You can get paid sooner for invoices and have peace of mind knowing you’ll have the capital you need to cover expenses, pay your employees and grow your business.
But resolving cash flow challenges isn’t the only way accounts receivable financing can help your business. You can also use the funds to take advantage of supplier discounts offered and capitalize on other lucrative business opportunities.
7. How to Apply for Accounts Receivable Financing
Most accounts receivable financing companies accept applications online. However, you should inquire before applying to confirm eligibility criteria and ask about any documentation needed to process your application.
