Accounts Receivable (AR) Financing is also called Accounts Receivable Factoring. It implies, the sale of accounts receivable at a discount in exchange for immediate working capital. It can be a perfect solution for any young and growing company. AR Factoring improves cash flow, accelerates growth at low rates and evades further debt compared to typical commercial financing.
Accounts receivables refer to the “money owed by customers to a company “. They are actually fantastic assets for a company. The duration clients pay their invoices is often 30 to 60 days or more. For some, especially established firms this duration is normal and acceptable.
Unfortunately not every company has the capital to wait that long for payment. There is a need for a Speedy cash flow by companies to take care of their expenses and operate their business. Also, quick access to working capital helps in planning business growth. Factoring companies offer to purchase a company’s outstanding invoices and can advance money within 24 hours. Depending on the Industry, the client’s credit history, etc., one can expect an 80% to 92% advance. This is called Accounts Receivable Financing.
What are the basic steps in Accounts Receivable Financing:
1) Your small business performs a service or delivers goods to your customers/clients.
2) You sell the invoice or invoices for that service or goods delivered to a factoring company.
3) You receive fast working capital up to 92% from the factoring company.
4) The Factoring company receives payment from the end client when the amount is due.
5) Once the factoring company gets the full payment from the client, it pays you the rest of your invoice amount minus the fees they charge for their services.
To qualify for this kind of financing, it is important to have your accounting set up correctly and receivables ready. The factoring company does its due diligence, checking your basic background, credit report of your client or clients and sometimes they review your financial statements if the advance amount requirement is large. The Factor verifies the accounts receivable invoices with the end customer to ensure that the invoice’s amount is correct and they are due in 30-60 days.
The Factor would then calculate the advance it is willing to provide and deposits the funds in your bank account by wire transfers or direct deposit. Once the end client pays the invoices in full, settles transactions and payment by the factoring company of the remaining percentage of accounts receivables after deducting their fee and charges is complete.
Businesses find Accounts Receivable Financing a fantastic financial tool. It helps you to get access to quick cash without going on debt. If your end client has a good credit history, your business is in a great position to qualify. Non-recourse or bad debt protection is also a great benefit of accounts receivable financing. This means if your client goes insolvent you have the additional protection you would not get with typical recourse receivable factoring.