Cut Out the Wait with Accounts Receivable Financing

When a business needs to raise capital quickly or to improve cash flow without going into debt, it may choose to engage in a process known as accounts receivable financing. Also referred to as simply factoring, accounts receivable financing allows a business to get the money it needs without having to wait for a long period of time.

In the business world, collecting on accounts can take a very long time. In fact, it is not unusual for it to take 30, 60 or even 90 days to collect payment. With accounts receivable financing, businesses can get the funds they are expecting right away rather than waiting for the payment to be made. While the business does lose some money because these invoices are sold at a discount, it brings the money in right away and allows the business to maintain the cash flow necessary to keep the business running. Furthermore, with the help of accounts receiving financing, businesses can take control of their funds rather than being at the mercy of their customers.

Unlike a business loan or other options for borrowing money, businesses can get the money they need within 24 hours when they choose accounts receivable financing. This is partially because the factoring company does not need to perform a credit check or other paperwork. Rather, the factoring company simply ensures the credit worthiness of the debtors and then takes on the responsibility of collecting on the invoices that have been purchased.

In general, the first step toward factoring accounts receivable is to build a schedule of the invoices that require funding. After the company submits this information to the factoring company, the factoring company verifies the invoices and checks the credit quality of the debtor or debtors. After the factoring company verifies the necessary information, it pays the company 70 to 90 percent of the value of the invoices. The factoring company then notifies the debtors and request payment to be made to the factoring company rather than to the original company.

It should be noted that the percentage that the factoring company pays to the originating company is dependent upon the credit worthiness of the debtors. If the debtor’s credit is somewhat shaky, the factoring company will advance an amount that is on the lower end of the spectrum. Regardless of the amount that is paid in advance, the originating company will receive more of its money after the debtor has paid the invoice. Of course, the amount received will be less than the full invoice value, as the factoring company will take out a fee before the remainder of the funds to the originating company.

Learn more about invoice factoring.