Accounts receivables financing is an accessible, convenient, and affordable financing solution for business owners looking to increase their available working capital. Hardly a newcomer to the business finance market, this funding strategy has been used to help businesses improve their cash flow position for over four centuries.
How Accounts Receivables Financing Works
Accounts receivables financing is an asset-based financing arrangement in which a company uses its outstanding invoices as collateral for a short-term loan. When financing accounts receivables, there are two options: either a company can finance their accounts receivables or factor them.
In the first option, the lender offers a short-term loan against the outstanding invoices at a rate of 65% to 85% of the face value for invoices aged under 90 days. The lender does not own the invoice and does not assume responsibility for collecting the outstanding debt.
On the other hand, with accounts receivables factoring, the lender assumes responsibility for collecting the outstanding receivables from your customers. The amount of financing that a factor company will offer on an outstanding invoice usually ranges from 70% to 90% of the total value of the receivable depending on the age of the account. Upon full receipt of the payment from the outstanding receivables, the factor company will return the remaining balance, minus a small processing fee.
The Benefits of Accounts Receivables Financing
- Quick injection of cash. Unlike the financing through banks or commercial lenders, financing through accounts receivables is based on customer credit and is therefore easier to obtain. There is generally no need for a lengthy business proposal or financial statements. The approval process is usually quick, and most factoring companies can advance the funding within a week of approval (which is good news for businesses dealing with a cash shortfall).
- No stress from collections. Business owners who choose to factor their accounts receivables then can give their debt collection responsibilities to another company and thus reduce the burden of trying to collect from no-pay and slow-pay clients. This frees up precious time and resources that can be directed to other areas of the business.
- Increase flexibility. By factoring receivables a business will be in a better position to fill more orders, extend credit on large orders, buy equipment or inventory as needed, and be able to take advantage of vendor discounts.
Who Should Consider Financing their Receivables?
Not so long ago, this form of business financing was particularly suitable for newly formed businesses and businesses with either bad credit or a poor sales history. But as the credit markets have shut the doors on small business lending, financing accounts receivables has become an attainable and affordable option for any business that is seeking to improve its cash flow position for operations or growth.
Susan Brown - Susie Brown is a small business consultant and freelance writer specializing in business and personal finance.
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