6 Steps in Accounts Receivable Financing

When businesses encounter cash flow shortages, there are several opportunities to alleviate short-term difficulties. Although many companies seek assistance from traditional lenders, the application criteria can be challenging for start-up businesses, as it’s hard to gain approval. If your company has experienced a cash crunch and you can’t get a bank loan, you may want to look at accounts receivable financing.


With this financing, also called factoring, small businesses find it easier to gain approval and receive immediate cash. Factoring doesn’t rely on your company’s credit score, doesn’t require an asset as collateral and it doesn’t lock you into a lengthy re-payment plan. Factoring works with your outstanding invoices and converts them into cash through a third party lender. Here are the six steps in accounts receivable financing.


  1. Choose which receivables will be financed.The selection process will be unique to each business, but there are some general rules of thumb. Select the most reliable invoices first; choose companies with a strong payment history. Factor only what’s needed for your budget concerns.


  1. Choose a financing company and apply for funding.As you look at the lenders, keep in mind that rates and terms will vary between each provider. Compare their recourse and non-recourse contract policies, check for hidden fees, early termination or monthly minimums.


  1. If approved, receive between 70% to 90% of your invoice value. Some companies may offer 100% of the face value. The lender will check the credit of your client to better understand the risk they are taking.


  1. Use the funds to meet business obligations.There are no stipulations as to how you can use your funds. You will often receive them in as little as 24 hours, either through direct deposit or wire transfer.


  1. The lender seeks payment from your customer.With factoring, the collection responsibility shifts to the lender. They will pursue your customer for payment, freeing you from the burden of collections.


  1. Remaining funds are disbursed, minus any fees.Once the invoice has been paid in full, whatever amount that was left from the advance will be refunded back to your company. The company will deduct their fee from the balance, often figured according to how long your customer took to pay the bill.


Accounts receivable financing is one way for companies to gain access to needed funds without the stress of adding long-term debt or seeking traditional funding.

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