Accounts receivables financing is an asset-based financing arrangement in which a company uses its outstanding invoices as collateral for a short-term loan. For more then four centuries this financing strategy has been used to help businesses improve their working capital and cash flow position.

HOW ACCOUNTS RECEIVABLES FINANCING WORKS

With accounts receivables financing there are two choices: either a company can finance their accounts receivables or factor them.

In the first option, the lender offers a short-term loan against the outstanding invoices at a rate of 65% to 85% of the face value for invoices aged under 90 days. The lender does not own the invoice and does not assume responsibility for collecting the outstanding debt.

On the other hand, with accounts receivables factoring, the lender assumes responsibility for collecting the outstanding receivables from your customers. The amount of financing that a factor company will offer on an outstanding invoice usually ranges from 70% to 90% of the total value of the receivable depending on the age of the account. Upon full receipt of the payment from the outstanding receivables, the factor company will return the remaining balance, minus a small processing fee.

THE BENEFITS OF ACCOUNTS RECEIVABLES FINANCING

*Quick injection of cash. Unlike the financing through banks or commercial lenders, financing through accounts receivables is based on customer credit and is therefore easier to obtain. There is generally no need for a lengthy business proposal or financial statements. The approval process is usually quick, and most factoring companies can advance the funding within a week of approval (which is good news for businesses dealing with a cash shortfall).

*No stress from collections. If you choose to factor your accounts receivables then you can give your debt collection responsibilities to another company and thus reduce the burden of trying to collect from no-pay and slow-pay clients. This frees up precious time and resources that can be directed to other areas of the business.

*Increase flexibility. By factoring your receivables your business will be in a better position to fill more orders, extend credit on large orders, buy equipment or inventory as needed, and be able to take advantage of vendor discounts.

WHO SHOULD CONSIDER FACTORING THEIR RECEIVABLES?

While financing accounts receivables is beneficial for any business that is seeking to quickly improve its cash flow for operations or growth, it is particularly suitable for newly formed businesses and businesses with either bad credit or a poor sales history. Even if such businesses were able to secure traditional financing to start up, it may be difficult to get this funding later on, and as stated above, a major benefit of this form of financing is that it is based in customer credit.

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