Accounts receivable financing commonly goes by many names: invoice financing, factoring, AR financing and similar terms. Whether you’ve heard of this type of financing before or not, it’s something that you should learn more about. When handled properly, factoring has the power to transform your business’s cash flow and finances. How does it work and what are the benefits?
What Accounts Receivable Financing Is
The specific terms of AR financing vary by lender, but the basic concept stays the same. This program involves selling unpaid invoices at a discount. It gives your business a cash advance on bills.
Imagine that you offer your customers 90 days to pay invoices. This means you have to wait three months between the time you sell products and the moment you see a dime of the funds you’re owed.
With AR financing, you can sell those unpaid invoices to a third-party lender. In exchange, you receive a large percentage of the value of the invoice immediately, usually within 24 hours. The percentage varies, but it’s often between 60% and 70%.
What about the rest of the funds? The AR financing company waits until your clients pay the bill according to the terms of service. After that, you receive most of the remaining funds in your account, minus a small percentage or fee.
What AR Financing Isn’t
This type of alternative funding isn’t a loan. You don’t have to worry about making payments on the funds you receive. There are no rules for how you should spend the money. The capital is yours to use however you want.
Many businesses use this method as a source of valuable working capital. You can cover lease payments, handle payroll, repair equipment, invest in advertising or take care of other needs. Once you get started with the AR financing program, submitting individual invoices is fast and easy.
When Accounts Receivable Financing Is a Great Idea
Not every business needs to use AR financing. If your company consistently has plenty of working capital available, it’s not necessary for you to speed up invoice payments. On the other hand, businesses that are always running out of funds or experiencing cash flow problems may discover that factoring is an ideal solution.
Healthcare businesses often run into this problem because insurers take a long time to pay. Manufacturers and other B2B companies can also benefit. You don’t need a great credit score to qualify. As long as you have unpaid invoices and trustworthy customers, getting started is relatively easy.