How Does Accounts Receivable Financing Work?

There are several ways you can help increase your working capital and stabilize your cash flow, even during business slumps and while trying to reach growth goals. One of the more popular methods for companies that use invoices is accounts receivable financing, which is an advance on money you are owed. It is good to learn some of the process details and definitions and see whether you qualify to determine whether this option is the best fit for your company.

What Is It?

Accounts receivable or invoice financing is the process of using your outstanding but not overdue accounts as collateral for an advance. This process can sometimes be referred to as factoring, where a third party, or factor, buys your invoices for a portion of the face value. You receive this portion within days of applying for the process and then the reserve portion, minus a fee of around five percent once the client has paid the invoice amount to the financer. A/R financing can sometimes differ from this in that your client will compensate you, and you will then repay the factor the amount of the advance plus a small fee instead of having the customer pay the financer directly.

Who Can Use It?

Invoice factoring or accounts receivable financing can be used by nearly any company that does business through invoicing with reliable clients and has payment terms of between thirty and ninety days. The factor will look more closely at the creditworthiness of your clients than that of your company, so this option is available to businesses with less than stellar credit. A/R financing is usually structured as a sale of assets but can be structured as a short-term loan where the invoices are considered collateral. Companies with no or poor credit histories can find it easier to qualify for an asset sale than a loan; qualifications and terms will vary between factors.

How Do You Apply?

Most companies offering this type of advance have online application processes with specific qualifications, allowing you to choose which invoices meet the criteria and your needs, fill out an online questionnaire and upload any needed verifications without leaving your office. Once approved, you will need to review the contract supplied by the factor and agree to the terms before the funds are released.

Companies experiencing a short-term need for working capital or a restricted cash flow can benefit from options like accounts receivable financing. This financing option is an advance and is usually structured as an asset sale instead of a loan. Invoice financing deals structured as loans are considered secured loans with the invoices acting as collateral.