Accounts Receivable Financing: What Is It & How to Get It

Mar 29, 2020 | Finance

Accounts Receivable financing

As a business, extending credit to your customers is a standard procedure. It’s a way to build trust and long-term relationships. 

It’s also a way to generate piles of accounts receivables on your books and no cash to operate with. 

When looking to quickly get cash for your accounts receivables, you can choose accounts receivable financing.

How Accounts Receivable Financing Works

What Is It

Accounts receivable financing (a.k.a. invoice financing) was developed by financial institutions as a way to help businesses get immediate cash while they are waiting for their invoices to get paid. 

There are two basic types of financing accounts receivables. 

  1. Secured borrowing – you get a loan and use the accounts receivables as collateral for that loan. That way, the invoices stay on your business’ balance sheet. The amount of the loan cannot exceed the amount you will get from your receivables.
  2. Accounts receivable factoring – you are selling your receivables to a factoring company (a.k.a. A/R financing company), and they are removed from your books. 

Secured Borrowing – How to Qualify for Secured Accounts Receivable loans

You’ll need to provide the bank or financial institution information for their review, which means reviewing your financial records. 

The finance company will determine if your business is qualified to get accounts receivable financing. 

The finance company or bank will check:

  • Your corporate taxes
  • The credit quality of your customers
  • Any liens that encumber your receivables
  • Your business’ receivables aging report
  • The background of the business owners

Credible A/R Financing Providers for 2020

There’s a variety of factors to check when looking for an A/R financing company. They can provide fast and affordable access to short-term working capital, but not all of their terms are the same from one company to the next. Some of the top-rated ones for 2020 are:

All of the above, except Payability, offer loan amounts over $5 million and advance rates of 90%. Make sure to check them out while researching possible financing companies. 

Accounts Receivable Factoring Process

  1. Step 1: Within 24 to 48 hours of selling your invoices to the factoring company, you will receive between 80% to 90% of the amount of the factored invoices. For example, if you sell $100,000 worth of accounts receivables at a 90% advance, you will get $90,000 from the factoring company.
  2. Step 2: The factoring company will keep the remaining 10%, or $10,000, as security until the invoices are paid. 
  3. Step 3: The factoring company will collect the receivables within one to three months period.
  4. Step 4: Once your customers pay the receivables, the factoring company will pay you the remaining 10% minus a factoring fee, which is usually between 1% to 3% of the total amount. If your clients are reliable payers and pay the receivables within 30 days, typically only incur a 1% fee, so keep that in mind when considering accounts receivable factoring. 

If finding accounts receivable financing is the way for your business to survive, then do it, so it can thrive later!

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