The Basics of Accounts Receivable Financing

If you’re running a small business, you probably already have some hands-on experience with the difficulty that can be managing cash flow. Luckily, there are a lot of tools out there for the savvy entrepreneur who wants to keep things running smoothly without a lot of worries. Mostly, they are credit and financial tools, and the right combination of them can be the secret to having a smooth payment history with vendors and lenders, regardless of how quickly your own customers pay. For businesses that rely on invoicing, this means learning how to access the money you are owed more quickly, which is where accounts receivable financing comes in.

Financing your receivables is basically the act of taking out an advance against the incoming money. The invoice is used as collateral for an advance, and typically the financing company takes charge of receiving payment. Once payment comes in and they have recovered the advance and associated fees, the rest is paid to you. If you are looking for an option that has no recourse and gets you out from under the invoice, factoring is also an option. The difference between the two is that factoring involves selling the debt and not financing an advance against it, so you don’t receive a second round of payment under most circumstances. This involves writing down some of the value of the invoice, but it does solve the problem of a customer who doesn’t pay in a timely manner.

If you’re not sure about which situation is better for you right now, it’s worth looking at a cost-benefit analysis. How much will accounts receivable financing cost in penalties and fees if the customer doesn’t pay? How late is the invoice already? If you’re sitting on invoices for a long time before financing them, it might be better to factor them out and avoid any worry about late fees. On the other hand, if a customer reliably pays in 30 or 45 days, for example, and it’s just not been that long? Then it’s probably a good idea to go ahead and finance the invoices at a lower rate.

Depending on the provider, financing sometimes requires you to put all your invoices into a pool as collateral. Factoring is more often done on an invoice-by-invoice basis, but there are exceptions to both rules if you look around. The options and flexibility are a big part of what makes this form of cash advance popular. Well, that and the fact that you can find zero recourse accounts receivable financing without settling for factoring if you look around for the right program.


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