Accounts Receivable Financing

Also known as invoice factoring, AR financing or accounts receivable financing is a business funding opportunity employed by small firms to finance growth of their business or for daily operations. As compared to varied small business loans, accounts receivable financing comes with reduced risk. This option of business financing is ideal for those businesspeople who do not like to take monetary risks.

What is Accounts Receivable Financing?

Accounts receivable refers to the outstanding invoices of a firm or the money owed by the company’s clients to the company. It indicates that the business has distributed a service or a product to its customer and thus has a right to get paid from the accounts of the client. Quintessentially, it signifies that a line of credit has been offered by a business to its customer. This allows the customer to make payment in a certain time period.

For instance, if a customer orders toys worth $2000 from a toy company, the company may not ask for the money upfront but instead invoice the client for $2000 and extend the payment due date by 20 days. Thus, for the payment waiting period of 20 days, the $2000 is regarded as accounts receivable of the toy firm.

Accounts receivable financing is a kind of monetary agreement wherein its accounts receivable is used as security/collateral by a company. A factoring company or an accounts receivable financing company generally purchases the outstanding invoices of a business at a reduced price, often about 71 to 89 percent of the payment due, and later collects the owed money on the due date. After collecting the owed amount, the AR financing company pays the original company the rest of the money (i.e. 29 to 11 percent) after deducting a service (factoring) fee. The primary advantage of this business option is that the original company gets its hands on immediate cash while the AR financing company charges a fee and makes money.

Benefits and Disadvantages of Accounts Receivable Financing

• In AR financing, the invoices (money owed) is used as collateral
• Invoices typically get funded and financed in a short period of 1 to 2 days
• It allows companies to quickly avail of liquid money.
• Businesses have no say in the process followed by the invoice factoring companies
• The fees levied by accounts receivable financing companies are usually on the higher side.

Applying for Accounts Receivable Financing

Before opting for AR financing, businesses need to ascertain the amount of cash they require immediately as well as select the invoices to be given for factoring. Some firms typically tend to factor the invoices of only those customers who take longer to pay the bill. Other firms will factor only that many invoices required to get cash for a particular purpose, while some other companies may opt to factor all the invoices.

Businesses have to provide all documents as required by local and state laws, such as AR report, sample bills, TIN, business license, and credit report, etc. The application form of the AR financing company also has to be filled up; this can usually be done online.