Accounts Receivable Financing

What is Accounts Receivable Financing?

Accounts receivable financing provides businesses with a flexible, accessible, and efficient way to manage their cash flow and access working capital. It addresses the challenges of long payment cycles, late payments, and cash flow gaps, allowing businesses to maintain stability, seize growth opportunities, and thrive in competitive markets.

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How Accounts Receivable Factoring Can Help Fund Your Business

When it comes to getting the cash your business needs to cover your day-to-day expenses, expand your operation or cover a large order, there are several options. The benefits of accounts receivable financing is that it is quick, doesn’t require a lengthy application and underwriting process, and is very flexible. With the sale of accounts receivable, there are no repayment obligations, so future cash flows remain intact and you can get your money in days rather than weeks

Businesses across all industries can benefit from financing receivables. Having the ability to raise fast cash without having to qualify for a loan as well as being able to forego future payments are the main reasons why financing receivable can help your business. Financing receivables also allows your business to offload liabilities from your balance sheet and improve the financial position of your company.

Financing receivables allows you to offer payment terms to your customers that may extend past 10 days, while you get paid immediately. When you sell accounts receivables, there is no repayment that needs to be made and no debt is created.

RELATED: How Much Are Your Accounts Receivable Costing You?

Why do Companies Sell Their Accounts Receivable?

Growing a business and meeting daily operational expenses requires cash on hand, but for many companies maintaining the right cash flow is difficult when your customers want credit terms such as net 30, 45, 60, or even 90+ days for payment. Allowing your customers the ability to extend their payment for up to three months can increase your ability to make larger sales and take on bigger clients, but it can also put a dent in the availability of working capital while you wait for payment. Many companies that get credit terms will wait until the last minute to make the payment in an effort to optimize their own cash flow situation.

The main reason that companies choose to sell their accounts receivable is simple: to reduce the amount of time between the sale of goods and compensation. This means you can now take on new orders without waiting for your existing payments to come through, or invest in a strategy to grow your company.

Sometimes money can be tight for your business and it’s not necessarily because you are bad at managing your cash flow. For many companies it is the result of several elements such as:

  • Long payment cycles from the original sale of goods or services to eventual receipt of cash
  • Slow-paying or non-paying customers
  • Unexpected operational expenses that significantly reduce available cash
  • The need to purchase raw materials or inventory to meet orders and sales

What Are The Benefits of Accounts Receivable Financing?

Selling accounts receivable is a quick way to keep cash flow up even though you offer your customers extended payment terms. When a company offers customers a credit term, they agree to provide the goods or services today in exchange for payment in the future. Because the company agrees to postpone the payment, they receive a premium, known as interest, from the customer at a future date. This process allows businesses to keep their prices competitive while offering customers a convenient way to pay for their purchases over time. Unfortunately, situations arise that prevent customers from paying for their goods and services on time. By missing payments, they prevent a company from accessing the cash from the sale to produce more goods and services, putting them in a bad financial position.

Key Benefits of Accounts Receivable Factoring:
  1. Improved Cash Flow: One of the primary benefits of accounts receivable financing is improved cash flow. Rather than waiting for customers to pay their invoices, businesses can access immediate cash by selling their outstanding invoices to a financing provider. This influx of cash helps businesses cover their expenses, meet financial obligations, and seize growth opportunities without being constrained by long payment cycles.
  2. Faster Access to Funds: Accounts receivable financing provides businesses with quick access to funds. Once the financing provider approves the invoices, they can provide an advance payment within a short period, typically within 24 to 48 hours. This rapid funding allows businesses to address immediate cash needs and bridge the gap between invoicing and payment collection.
  3. Reduction in Bad Debt Risk: When a business extends credit to its customers, there is always a risk of non-payment or bad debt. With accounts receivable financing, the financing provider assumes the credit risk. They assess the creditworthiness of the business’s customers and take responsibility for collecting payments. This reduces the risk of non-payment and provides businesses with added protection against potential bad debts
  4. Enhanced Working Capital: By converting accounts receivable into immediate cash, accounts receivable financing boosts a business’s working capital. Working capital is vital for day-to-day operations, purchasing inventory, meeting payroll, and investing in growth initiatives. With increased working capital, businesses have the financial resources to operate smoothly and take advantage of new opportunities.
  5. Flexibility and Scalability: Accounts receivable financing offers businesses flexibility and scalability. Unlike traditional bank loans that have fixed borrowing limits, accounts receivable financing allows businesses to access funding based on their sales and the value of their outstanding invoices. As the business grows and generates more invoices, the financing can scale accordingly, providing a reliable and adaptable source of working capital.
  6. Focus on Core Operations: Managing accounts receivable, chasing payments, and handling collections can be time-consuming and distract businesses from their core operations. With accounts receivable financing, the financing provider takes over the responsibility of collecting payments, allowing businesses to focus on their core activities such as sales, customer service, and product development. This enables businesses to operate more efficiently and effectively.
  7. No New Debt or Impact on Credit Rating: Accounts receivable financing is not a loan, so it doesn’t create new debt for the business. Instead, it leverages the value of the existing accounts receivable. As a result, it doesn’t impact the business’s credit rating or debt-to-income ratio. This can be advantageous for businesses that may have difficulty accessing traditional financing due to a lack of credit history or lower credit scores.

By selling accounts receivables to an invoice factoring company, businesses can get the cash they are owed quickly and conveniently without the need to hassle customers for cash. Most small to mid-sized businesses don’t have an established collections department, and the best factoring companies will provide the collection service at no cost.

RELATED: 8 Rules for Managing Your Accounts Receivable

How Does Accounts Receivable Financing Work?

Factoring companies typically look at several criteria to determine if an applicant qualifies for accounts receivable financing, including the customers’ payment history, the applicant’s credit history and corporate tax information. Using this information, the factor will determine if an invoice or invoices are worth taking as collateral. If an invoice carries a high-risk due, the lender may reject it.

Here’s a quick breakdown of how accounts receivables financing works:

  1. The business owner sells a service or product to a customer, allowing the customer to pay at a later date—often 30, 60 or 90 days later.
  2. The business owner uses this customer’s invoice as collateral to secure a cash advance from a factoring company.
  3. The factoring company advances issues a cash advance — typically between 80% and 95% of the invoice — to the business owner.
  4. The factoring company collects payment from the business’s customer.
  5. The factoring company pays the business owner the remaining difference of the invoice minus a fee.

How Much Does AR Financing Cost?

So, how much do factors charge for accounts receivables financing? Fees vary from lender to lender, though most charge a fixed-percentage interest fee, such as 1% per week. Universal Funding’s rates start as low as 0.55% per month, not weekly.

As you can expect, accounts receiving financing fees using this structure can fluctuate depending on the age of the invoice and quality of the client. If a customer doesn’t pay his or her invoice for several months, it increases the total fee amount. Therefore, business owners should carefully select invoices used as collateral for this funding option.

What is an Accounts Receivable Factoring Company?

Did you know that the accounts receivable aspects of your business can be handled by an accounts receivable factoring company? These are financial corporations that will buy your invoices and provide your company with an immediate cash advance so that you can get back on track and concentrate on generating more business. Accounts receivable factoring companies are also called asset based financiers. Working with an A/R factoring company may be the missing piece to your businesses growth.

When you are owed money by your customers, you can use this quick funding option as a way to keep cash flow up when clients are slow payers or have extended terms. The accounts receivable factoring companies give you cash so that you can look to new business and not focus on manually processing your invoices of products or services that have already been sold. Accounts receivable processing can take weeks, sometimes even months. Working with the right factoring company may be the missing piece in your company’s future growth.

There are many variables that can have an effect on the percentage that you receive in your advance. For instance, the age of your accounts receivable, the total net worth of them, your customers’ credit strength, trends in customer payment cycles, and the current climate of your industry.

RELATED: 10 Considerations When Selecting the Best Factoring Company for Your Business

Preparing to Sell Your Receivables

The process for selling receivables is straightforward. First, identify the accounts you want to sell and contact a factoring company. In many cases, the factoring company will review your customers’ credit to determine whether they can purchase the invoice(s). The factoring company gives you a significant portion up front of the invoice(s)–generally from 80 to 95 percent of the total invoice amount. Once the customer pays the invoice, you will receive the remaining balance minus any fees you owe to the factoring company.

What is Accounts Receivable Insurance?

Accounts receivable insurance offers protection against financial losses to its accounts receivable. When a company is unable to collect from its customer that owe the business money, AR insurance protects against these losses.

Universal Funding provides accounts receivable insurance which helps protect clients from unforeseen and unexpected potential losses due to their customers’ inability to pay. Accounts receivable insurance is a form of credit insurance offered by commercial insurers to businesses and can take the form of multi-buyer insurance (a pool of receivables) or key buyer insurance.

At Universal Funding, we assess the risk of your customers’ credit and payment cycles to determine a recommendation for accounts receivable insurance. This assessment is one of the added services we provide to all of our clients. If the assessment proves that your accounts would benefit having additional AR insurance, we work with a third-party vendor to provide those services.

Protect Your Profits With Accounts Receivable Insurance

Accounts receivable insurance offers protection from non-paying customers who have become delinquent in paying your invoices. It is very useful for a business that is growing rapidly and does not have the resources to do regular credit checks on new and existing clients. By partnering with a factoring company like Universal Funding who offers this added benefit, your company can get accounts receivable insurance that will protect you against lost receivables. This includes receivables from companies that have defaulted, claimed bankruptcy, or failed to pay within the allotted terms. The insurance protects your company in the event you are unable to collect money from the client and helps to provide the much-needed protection you need to manage your business profitably.

Learn how accounts receivable financing can help you get quick access to working capital.