Understanding Accounts Receivable Financing

If your business depends on a cycle of invoicing and payment after work is delivered, you know that all it takes to disrupt your cash flow is a couple customers running late at the same time. Companies who use invoice-based models have to prepare for this, and there are a lot of ways to do it. Building a cash reserve you can count on for a rainy day helps some, but it isn’t always possible. That’s where accounts receivable financing becomes your go-to tool. There are a lot of methods of short-term financing, but none of the alternatives involves a cash advance against the money you are owed directly, and no other financing format is designed and priced for companies built like yours.

What Happens When You Finance Receivables?

Unlike many other forms of financing, factoring invoices involves a cash advance against your customer’s outstanding invoice. That means your credit rating and other debts don’t play the central role they do when you apply for hard money loans and other short-term devices. Instead, your customer’s financial health and payment history are the central factors, along with the estimated time to repayment and size of the invoice. There are many ways to structure these deals, some companies will require all the outstanding invoices held by an accounts department be pooled, with the advance based on their sum. Others will finance just a single invoice or a group of them, so you have options to suit the individual situation that prompted the move to get financing.

When you are pricing your options for accounts receivable financing, there are generally two models. The first involves a flat fee, no matter how long it takes to get payment from your customers. It tends to be a little pricier to finance customers with a regular payment pattern under that system, but it saves you on extra fees and penalties if they take a long time. The other method involves a tiered system of fees and penalties designed to save you money when customers pay as expected.

When Can Accounts Be Financed?

If you find the right financing company, you can get an advance any time you have outstanding invoices. Fees for this service tend to be very predictable, so if you have customers who regularly require you to use it, you can easily fold it into initial work estimates, offloading the extra fees to the customer who made financing your receivables necessary. Of course, since you can take advantage of accounts receivable financing whenever you have outstanding invoices, you can also get advances when you need working capital, not just when your cash flow is tight. Get the extra funds you need to start a big project without waiting, or just get the funds you need for a big asset purchase.

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