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What is Accounts Receivable Financing?

Accounts receivable financing is a great way to improve your capital and address short-term cash flow needs – but what exactly is it? This guide will review everything you need to know about AR financing, including why and how it might be beneficial for businesses. 

AR Financing: The Basics

Let’s start by reviewing the basics of accounts receivable financing – or AR financing. What is this process, and how is it different from other types of traditional financing?

To answer these questions, you must first understand what accounts receivables are. This line on the balance sheet represents an asset that consists of invoices you have already sent to your customers – they just haven’t paid for them yet. 

AR is considered a current asset since payment is generally required within a one-year window. Think of this line item as cash flow that you know you have coming in. The products and services are delivered, which means all that is left to do is wait for the customers to pay!

So, what happens if you need that money sooner than the 30- or 60-day terms permissible to your customers? That’s where accounts receivable financing comes in.

Generally, the financing company will pay you up to 80% of your accounts receivable upfront. This value will vary based on your industry since the lender wants to ensure there is a high likelihood that the customers will make payment.

The remainder of the invoice will be paid out to you – minus a fee – when the customer pays the invoice in full. At that point, the AR is considered paid, and the financing is closed out. 

Accounts receivable financing is much faster and more flexible when compared to traditional financing options. Other financing tools often require a credit application and a structured loan term, which can take time to process and may be difficult to get approved. 

Factoring receivables is also a lot less risky than other financing methods from the lender’s perspective. They know that the customers are obligated to pay eventually, so rather than relying on your credit history or financial position, they can secure the loan through the outstanding invoices.

As a result, they offer competitive rates and rapid turnaround times – you may have your funds within just 24 hours!

Benefits of Accounts Receivable Financing

Now that you understand what AR financing is and how it works, it is time to address another valuable question: what are the benefits of accounts receivable financing?

AR financing is a powerful tool that businesses can leverage to access fast and easy capital. You need money to keep your business running, and sometimes you can’t afford to wait until your customers pay their invoices. 

By opting to finance your accounts receivable, you will receive immediate payment from the factoring company – and another payment later once the invoice has been paid in full. This is especially beneficial for companies that have to offer Net 30, 40, 60, or even 90-day terms to be competitive in their industry. 

Over time, this lag in customer payments can create a cash flow shortage. Think about it – you’ve already sold the goods and services, which means. You incurred operating expenses like salaries and materials to make that happen. Without getting consistent inflows of cash, you can run into a problem very quickly!

New and growing businesses can’t afford to stop production or shut down sales while they wait for accounts receivables to be collected. Factoring is an ideal solution because financing companies will often link directly to your records and provide you quick and consistent cash to float your business!

In other words, you never have to turn away customers or push sales because your operations require more cash than you have available. It can give you the capital you need without creating a huge liability on your balance sheet. 

Is Accounts Receivable Financing Right for My Business?

You may be wondering, is AR financing right for my business? Should I consider this option the next time we need to boost our cash flow?

Most businesses offer some type of credit to their customers. That means they can pay later – after you have already delivered the goods and services. 

If your organization falls into this category, then you will likely benefit from accounts receivable financing. It gives you a way to quickly address cash flow shortages and ensure your business runs smoothly – without having to shorten the credit window for your customers. 

For small to medium-sized companies that are still developing their working capital, this can be the perfect solution. Remember that it doesn’t involve a credit application, so you can access this option even if you do not have a long credit history. 

Simply put, accounts receivable financing is right for any business that needs access to cash quickly – it is faster than a loan and much cheaper!

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