If you’re a small or mid-sized company, you’re likely concerned about cash flow. Without the huge operating budget of a larger conglomerate, money can be hard to come by—especially when your customers demand longer payment terms. If you’re ready to stop worrying about delayed payments and inefficient collection methods, consider accounts receivable financing.
What Is Accounts Receivable Financing?
An “accounts receivable finance” is a kind of asset wherein a business uses its receivables (e.g., customer payments) as collateral in exchange for a cash advance. In its simplest form, it’s an arrangement in which a company receives credit using an amount payable to the party in exchange for a good or service. Companies turn to accounts receivable financing so they can have cash in hand quickly without waiting the 30-60 days typical of a customer payment.
Many businesses turn to accounts receivable financing to unlock business opportunities and reduce their risk of accruing bad debts. The funds that you receive, usually within 24 hours, are unrestricted, granting the flexibility you need—which traditional banks can’t provide.
Accounts receivable financing has several other benefits, including:
- Total customization and management options. Take what you need when you need it.
- Your financing will match the true value of your receivables.
- You can expect up to 100% of the payment in advance.
- The decision is based mainly on your customer’s creditworthiness, not wholly on the degree of your business’ financial strength.
- Your clients are usually unaware of the financial arrangement.
How Does Accounts Receivable Financing Work?
The financing process is typically broken down into six essential steps:
- Account Setup
As part of the initial account setup, your financial institution must complete its due diligence to ensure you can be financed. It may check:
- Your clients’ credit profiles
- Your company’s receivables aging report
- Lien information that may affect your receivables
- Your corporate taxes
- Relevant background information about business owners
Depending on the amount of financing requested, your financial institution may also require your financial statements. Once you’ve cleared this hurdle, your account can be set up.
- Readying Your Receivables
Next, your job is to select the clients and receivables that will be funding your financing. Customer invoices can be submitted via a secure website, email, or fax. You may also be required to submit additional documentation, like a schedule of accounts document.
- Verification
Once the customer receives the goods or services, the financing company verifies them. This process ensures all invoice amounts are correct and that they’re due within 30-60 days. This step assures each party that there won’t be hiccups in the funding chain.
- Financing the Receivables
Upon verification, the funds are ready to be distributed to the company. The financial institution will calculate the advance and deposit the funds into the business bank account.
The advance represents the percentage of the invoice the financial institute will fund. It may decide to fund up to 100%, but the industry standard is generally 80%. Funds are usually distributed within a business day of verification. Funds are sent either by wire transfer or ACH (direct deposit). Wire transfers are available with 24 hours. ACH may take up to two days.
- Settling the Account
Your customer will pay their invoices on a pre-agreed upon schedule. Mailed payments will be sent to a secure lockbox or a facility that allows your funding company to process checks with your name. If a customer pays his or her invoice electronically, it will be deposited into a designated account.
Once the funds are received, the transactions are considered settled. Invoices are considered paid, and the 20% not advanced will be rebated, less a financing fee.
- Repeating the Process
Companies can use accounts receivables financing as an ongoing process to improve their business’ cash flows. Funds can help your business invest in new opportunities or pay for general operating costs.
Ending Your Contract
When you no longer need accounts receivable financing, there are a few different ways to end a contract. You can:
- Move to a new lender who will use its funds to close your account.
- Let your accounts pay out, which will close your account automatically when the last invoice is paid.
With the right financing and support, you can find a solution to get back ahead—whether you’ve been suffering from tax problems, payroll concerns, or the typical growing pains that accompany all small and mid-sized businesses.
