Everything You Need to Know About Accounts Receivable Financing
There are several different methods you can use to increase your cash flow and even streamline your customer payment options and accounts receivable financing is one of them. Before you go looking for a company to get this type of financing from, it is a good idea to know some of the basics such as what is AR financing, how does it work and what benefits can it offer.
What Is It?
A/R financing lets you take your invoices and turn them into working capital quickly without shortening the amount of time that your customers have to pay. In some types, you will retain ownership of the invoices and pay back the advance given to you by the lending company, or factor; in other types, the factor will take over the invoices completely and you will not have to collect on them.
How Does It Work?
Once you have finished the customer’s order and issued an invoice, you can take advantage of accounts receivable financing by contacting a factor and getting an advance on that invoice. Your customer will still have the full thirty to ninety days to pay off their balance, but you will get the cash you need within days. You will receive a portion of the invoice amount as an advance and then once it is paid in full you will receive the rest of it, minus the factor’s fee. Most companies will charge between three and five percent for this type of financing.
What Are the Benefits?
Some of the benefits of A/R financing can include helping to build a strong credit history, weathering a downturn in business and taking advantage of market trends. Some factors will report accounts in good standing to the credit bureaus, which can make it easier for you to build your business credit up from the beginning or after troubled times. This type of advance can also help you weather downturns in business, such as the end of a season because you can get the cash you need for bills now and let the customer pay according to the invoice terms.
Accounts receivable financing can be a good way to get the funding you need when you need it for work you have already done. This can help you make supplies purchases for your next big project or just build your credit back up after a rough patch. It is a good idea to understand the process before you apply for A/R financing, however, so that you know what types of fees and terms are fair.