A traditional debt-based loan isn’t the only financing solution available for your businesses. There is also asset-based funding, including accounts receivable financing.
Overview of Accounts Receivable Financing
Also known as invoice factoring, accounts receivable financing is a funding method in which a business owner uses his or her outstanding invoices as collateral for a cash advance. The business owner receives fast cash without jumping through the hoops associated with conventional financing options, and the factoring company generates revenue by charging a fee.
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:
- 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.
- The business owner uses this customer’s invoice as collateral to secure a cash advance from a factoring company.
- The factoring company advances issues a cash advance — typically between 80% and 95% of the invoice — to the business owner.
- The factoring company collects payment from the business’s customer.
- The factoring company pays the business owner the remaining difference of the invoice minus a fee.
What are Factoring Rates?
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.
Benefits of Accounts Receivables Financing
Accounts receivable financing offers several benefits to business owners, one of which is short-term capital to cover immediate expenses. Business owners often struggle to pay their bills during periods of fast growth. With accounts receivables financing, they can cover lease, utilities, payroll and more instead of making major sacrifices during cash flow gaps.
Accounts receivable financing is also fast, allowing business owners to receive funds in just 24 to 48 hours. In comparison, it takes a minimum of 60 to 90 days to acquire a traditional bank loan.
Another benefit of accounts receivable financing is the simple fact that business owners don’t have to collect payments from customers on outstanding invoices. According to a survey of business-to-business (B2B) professionals conducted by Atradius, collecting payments on outstanding invoices is the biggest challenges for 22.5% of respondents. According to the survey, 90.3% of respondents reported late payments by their B2B customers. With accounts receivable financing, the factoring company handles the outstanding invoices and all necessary collections; thus, eliminating this otherwise laborious and time-consuming task.
Finally, because accounts receivable financing is asset-based, there’s little weight given to borrower’s credit history. This means business owners with bad credit can still qualify for financing, assuming they have high-quality outstanding invoices to use as collateral.
Your Questions Answered Quickly
Whether your business is thriving and you can’t keep up, or you are waiting on clients to pay, Universal Funding can help your growing company. Call us at 855.851.7416 or complete our rate form today to learn more about invoice factoring and how it can improve your company’s cash flow.
About Universal Funding
Universal Funding is a private funding source that has funded thousands of businesses and more than $2 billion since 1998. We turn your accounts receivable into the funding you need through invoice factoring and can have capital in your hands in a matter of days.