Accounts receivable financing involves receipts of early payment against outstanding invoices from a lender.
The company commits to a lender either all or a portion of its outstanding invoices raised on customers, and received payment against them. The lender charges an agreed fee for the service.
The Different types of accounts receivable financing:
Assets Based Lending
Through this kind of financing, the company in question needs to commit most of their invoices to the lender. This is also known as an asset based lending since accounts receivables are considered as part of the assets of the company.
This kind of financing allows the lender to sell its unpaid invoices to a lender. However, the lender does not pay the entire receivable amount to the company.
The lender pays a percentage of the outstanding amount less the processing fee.
Through this type of financing, the company may choose which invoices they want to get financed. In this case, the fee charged by the lender is relatively higher.
Through this financing, the company has complete control over which receivables it wants to get financed from the lender.
Another differing point is that through this kind of financing, the company can secure the entire amount of the receivable invoice. Rates are also lower for this lending.
A more important aspect of this kind of financing is that this kind of lending does not impact the balance sheet of the company in any way.
The Effects of Accounts Receivable Financing on Cash Flow
Cash flow issues are not uncommon for any kind of business. They usually occur in cases such as when a company needs to pay off its invoices on a timely basis. On the contrary, customers of the company would clear invoices after the lapse of one to two months.
This way a lot of money gets tied up in outstanding invoices. The situation eventually results in cash flow problems throwing the business into a financial grind.
Accounts receivable financing is a way of getting your hands on cash in order to bring improvement to your cash flow. The phenomenon is also known as accounts receivable factoring.
By obtaining finance against outstanding invoices that are slow in payment, you can have the funds required for running your day to day operations in a smooth manner.
Another good thing is that, in most cases of accounts receivable financing, you do not need to worry about collection because the lender agrees to make follow ups with clients and customers.
If obtained and used in an appropriate manner, accounts receivable financing will not only improve your cash flows, it will also provide further benefits to your cash flows.
The article below will discuss some of those benefits for the information of the reader.
Getting Paid on time
The problem with overdue outstanding invoices is that they don’t get paid on time. Accounts receivable financing is the kind of financing that allows you to get your money by monetizing your receivables.
This way, you can have your money immediately, and do not need to wait for the clients / customers to pay up.
Your cash flow also remains within control which may otherwise, experience congestion. You are able to use this money for the further growth of your business.
Cash flow and Credit Worthiness
One of the most important things that may affect your cash flows in the long run, is the credit worthiness of your entire client base.
An important reason why big lenders and factoring agents agree to provide you with accounts receivable financing is that they need to monitor the credit worthiness of your company as well as that of your clients.
If the client / customer is not credit worthy there is no need to work with them since, sooner or later, they may become problematic for your cash flows.
When you go for accounts receivable financing from professional lenders and factoring agents, you get an idea regarding which one of your clients are punctual in their payments, and which ones aren’t.
This knowledge may be extremely useful in future because you will cease working with people who usually take more time in clearing their outstanding dues.
Selection of new Clients
Accounts receivable funding, can become very useful when you want to keep your cash flow bustling. There comes a time in business when it wants to add new clientele to its existing portfolio fir the purpose of improving cash flows.
With the help of this kind of funding, you can choose to factor only invoices that pertain to the new clients.
One thing that you must keep in mind is that you should only factor those invoices against which work has already been completed. Factoring these invoices will bring improvement to your cash flows.
If you use this method in its appropriate manner, you are not only able to keep you cash flows healthy, but also gradually increase your customer base.
Receive Fund Immediately
Accounts receivable financing is a rather and quick process when compared to other forms of lending.
Imagine being low on cash, and in need for urgent money.
You go to a lender and apply for a loan. The approval and disbursement process take around 10 to 15 days. By this time, your need for cash has become acute. You try and find other resources, but in vain.
In the end, you get the money from the lender when you have already missed the opportunity that you were eyeing.
However, when it comes to accounts receivable financing, the procedure is very fast and speedy. The lender checks your invoices and then grants approval.
Disbursement takes just a day or two after approval has been obtained. You have your cash within no time at all.
The quick turnaround time is very beneficial for businesses that are always on the lookout for great opportunities, and seek to encash them at the first available chance.
The best thing about a great business is its dynamic cash flow. Accounts receivable financing is the kind of lending that matches the dynamic outlook of the cash flow of a thriving business.
This happens because the financing amount through this process increases with the passage of time due to business growth, and more number of invoices for factoring.
In case, the lender seeks to carry out yearly review or due diligence of your clients, it does not matter for you or your client because the process simply takes one or two days.
The Final Word
If you are seeking out financing for your business, you have several options available to you. You could go for term loan, short term loan, and equipment financing etc.
As a business owner, you are required to choose the one that suits you best in a particular situation.
When the objective is to strengthen your cash flows for a short while until your receivables get paid, the best option is simply to get those same invoices financed by a lender.
Of course, you are required to pay some fee on financing, but it is much better than waiting for the clients to pay you —time is money.
The above information is for businesses that experience tough situations due to shortage of cash flow.
In all such situations, you may use accounts receivable financing, and grab the opportunity you were eyeing.