Accounts Receivable Financing & Your Business

Cash flow has always been a concern for businesses. Unfortunately, there just doesn’t seem to be a solution, or is there? Well, there is one remedy companies can call upon. It’s a practice that has become extremely popular amongst those businesses looking to take charge of their finances. What is it you ask? It is accounts receivable financing and it’s easily the most impactful form of business financing available today. Simply put, receivable financing provides companies with immediate access to working capital. Companies can then use this capital to lower their costs by negotiating prompt payment discounts from vendors, use the money to cover their day to day operating expenses, or simply use the capital to enact strategic plans for growth. The point is, accounts receivable financing allows companies to do what they want, when they want. So, how does it work?

A company’s unpaid customer invoices are assets. When customers take too long to pay off invoices, the value of these invoices, or assets, is reduced. This comes from the daily cost of money and the high costs of business credit. The longer it takes customers to pay their invoices, the higher these costs and subsequently, the lower the gross profit is per sale. With receivables financing, companies sell their customer’s unpaid invoice to a factoring company, who then provides the company with credit based of the invoice’s value and the customer’s ability to pay. In return, the financing company collects on the invoice directly from the customer. Once the invoice is paid in full, the financing company reimburses the company the difference and charges a small fee for their services, usually around 3%.

Accounts receivable financing puts the power of financing in the hands of businesses by giving them the working capital they so desperately need to meet their day to day operating expenses. In essence, companies can access this capital earlier than they would if they were to wait for customers to pay their invoices. Early payment means companies can better manage the inconsistent cash flow of business cycles, reduce their overall cost of money and use capital to grow their business. However, the best part of this financing method is that it doesn’t rely upon the company’s credit worthiness, but instead relies upon the customer’s ability to pay.