If you own a business, you’ve likely run into the issue of how to manage your cash flow. For some businesses, the money can get tied up in equipment and new inventory. For others, the money may just be delayed because of late invoices that need to be collected on. If your business falls in the latter category, there are some ways to better manage your money and free up cash through the help of accounts receivable financing.
What Is Accounts Receivable Financing?
If your business sends out invoices to clients with net payment terms of 15, 30, 45, 60, 90 days or more, then you are probably eligible for accounts receivable financing. Essentially, accounts receivable financing is a way for business owners to get immediate capital by either selling their invoices or using outstanding invoices as collateral. Depending on the terms of the agreement you have with an accounts receivable financing company, you may be able to get up to 100% of the value of the invoice in advance. Typically, you’ll be charged a fee for each week it takes for the customer to pay the invoice in full.
Are Accounts Receivable Financing Options Considered Loans?
Typically, these agreements aren’t considered business loans, but they are structured similarly. Basically, the unpaid invoices serve as collateral so you don’t have to put anything else down upfront. Also, if your customer ends up paying the invoice in full, you don’t have to make any additional payments to the financing company that gave you the advance.
How Does Accounts Receivable Financing Work?
So now that we’ve covered the basics of what this type of financing is, it’s time to go over how it actually works. There are a few basic steps that are needed in order to secure this type of financing. They include:
- First, you have to find the receivables (invoices) that you’d like to finance.
- Once you’ve picked your receivables, you need to now find an accounts receivables financing company you’d like to work with.
- Next, the lender will give you an advance on the receivable. It may be anywhere from 80%-100% of the total value of the invoice.
- After that, you have immediate access to this money to use for paying expenses, covering payroll, etc. The lender will collect a weekly fee until the customer pays their invoice.
- Your customer will actually pay the lender the full amount of the invoice.
That’s it! If you’re in need of additional financing, take advantage of the options available to you!