The Basics of Accounts Receivable Financing

Running into a part of your business cycle where you’re owed a lot of money for work that has been delivered but you need funds now to keep working is a very common problem, and you’re not alone in looking for a solution. If your company has this issue built into its business structure, there’s no way to avoid the fact that customers will pay when they are ready, and sometimes that isn’t upon receipt of invoice or thirty days after. Luckily, this problem has a solution with a variety of nuanced options to make sure it fits your company’s needs. Accounts receivable financing not only gives you a cash advance against your invoices, but it can also be used as part of a larger asset financing or inventory credit plan.

The concept is simple. This kind of financing is, at its core, a factoring agreement, and factoring is one of the oldest methods of commercial financing. Factoring is essentially when someone has an asset or resource with a known payout in the future. The factor advances a portion of that value and assumes responsibility for collecting the payment. Then, when payment comes in, the advance and the factor’s handling fee are deducted before the remainder of the money is passed on to your business. Modern factoring usually uses invoices or purchase orders as the basis for calculating accounts receivable financing values, but in the past farm harvests, mining proceeds, and profits from trade caravan imports were also common assets for merchants to factor.

All of the modern financing methods that descended from factoring are designed with one purpose in mind, and that is putting businesses in touch with working capital when there is a bumpy part of your business cycle. If you are just starting with invoice financing, the important choice to make at first is whether you’re going for an advance against all of your accounts or a single-invoice factoring agreement for just a handful of larger invoices. Different financing companies have different philosophies about which is preferable, so shop around for the right match of format and feet. Then, all you need to do is reach out. Most of the time, your credit matters less than the financial health of your customers, because it’s their ability to pay that determines the level of risk involved in accounts receivable financing. The better your customers’ credit and the sooner they are likely to pay, the less it costs to get an advance against their invoices.

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