Accounts receivable financing, also known as invoice factoring, is a business financing option for small business owners to receive cash advances on their unpaid invoices. It’s a convenient and fast way for small and mid-sized businesses to raise capital. This type of financing approves businesses quickly, provides them with fast access to capital, helps them stay on top of expenses, and ultimately assists in growing the business.
How Does Accounts Receivable Financing Work?
Instead of a business waiting, sometimes up to 90 days for a customer to pay the invoice, an invoice factoring company will typically advance between 70% to 95% of the invoice amount upfront. Selling your invoices to an accounts receivable financing company allows them to advance your funds immediately, so your business doesn’t need to experience additional financial strain.
Below are the common stages of the accounts receivable financing process:
- Send outstanding customer invoices to your factoring company for approval.
- You’ll receive immediate funding for an approved invoice. The funding advance can be anywhere from 70% to 95% of the total amount and depends on the invoice’s size, the customer’s industry, and credit. All this information is laid out in the provided factoring contract and agreement terms from the company you partner with for funding.
- The factor holds onto a portion of funds until the customer pays the rest of the amount at the end of the invoice payment term.
- The factor sends the remaining invoice amount minus a small factoring fee once the receivables are collected.
Top Reasons to Consider Accounts Receivable Financing
1. Approval is quick and easy
Approval for a business loan through traditional financing sometimes takes months and requires collateral and a good credit score for approval. An invoice factoring company bases a business’s approval on the customer’s credit score, not the business’s. Porter Capital can approve a business in as little as one business day. Many companies choose this type of financing because it’s hassle-free, convenient, and provides your business with consistent funding to avoid cash flow problems.
2. Fast access to capital
When businesses grow quickly, they need to buy more inventory, hire new employees, and sometimes purchase new property. However, not all companies will have the working capital to support growth. Invoice factoring helps businesses access fast cash from their accounts receivable so they take on more growth opportunities. Ideally, a growing company will have more accounts receivable to finance and receive funding 24 hours after sending in outstanding invoices.
3. Helps struggling businesses
All businesses go through ups and downs. Sometimes the industry is in decline, or a product has a recall. Whatever the reason, all businesses need financial assistance to maintain a steady cash flow during a crisis. Often, traditional banks won’t approve a business that’s taking a downturn. Luckily, factoring companies are more concerned with the customer’s financial status than the business itself. Invoice factoring is a reliable source for businesses in the long and short term.
4. Factoring is flexible
Although the factoring process can sometimes be more expensive than traditional types of financing, the positives outweigh the negatives. Businesses can take advantage of vendor discounts, discounts on large inventory orders, or incomparable sale prices because they can access their capital through factoring. Having a consistent cash flow margin helps a company take advantage of opportunities otherwise missed out on.
5. Factoring helps with accounts receivable management
A factoring company not only provides you with fast payments but also with back-office assistance with your receivables. A factor will help manage and administer the accounts receivables of its clients, ensuring that debtors pay on time. Having this assistance can help a business decrease its bad debt, improve the cash ratio, and run a smoother operation.
6. Support Your Business Growth
Factoring enables you to capitalize on business possibilities promptly. Because you are not waiting to be paid, you can finance equipment improvements, purchase materials and supplies, and recruit new employees as soon as they are required. Factoring for a startup or small business allows you to reclaim control of your company’s development in the competitive landscape.
7. Provide Funding for Startups
Most small companies and startups have financial difficulties. Additional financing through factoring may be a good solution, enabling you to support your company by leveraging your customers’ credit. You may receive money fast through accounts receivable, factoring in qualifying accounts at any time. You can be paid the same day in many instances, allowing you to devote your time to other business obligations other than sourcing an additional budget.
8. Builds Your Credit Extension
Bank credit lines may take a long time to create, are typically rigid, and are usually restricted by what your business can attach as security. When you choose to work with a factoring company, you receive quick service and versatile financing.
Most factoring firms will allow you to prolong your receivable periods to obtain large customers. It may not be accessible when consumers constantly discover methods to extend payment beyond 30, 60, and 90 days. Even if you are sure you will pay your bills, your clients may have procedures or practices that create delays.
9. Simplified Collections
Business owners say collecting receivables is one of their most complex and time-consuming tasks. The factoring program removes you from the receivables business, allowing you to concentrate on servicing your customers and operating your business.
Tips on Making the Most Out of AR Factoring
You must keep these tips in mind to ensure you get the best out of accounts receivable factoring.
1. Work With a Factoring Company That Uses a Bank Lockbox
Bank lockboxes timestamp every transaction. If you are anxious, you may request a duplicate of a check from the bank lockbox. Factoring services know this, and a trustworthy factor will offer timestamped checks when requested. If payments appear to be taking too long, banks will give comprehensive information on when checks will arrive. That will also assist you in ensuring that your clients’ payments are applied on time and that you are not being overcharged on clearing costs.
2. Ask Around Before Exchanging in a Factoring Transaction
Remember the adage, “an ounce of prevention is worth a pound of cure.” You’re far less likely to get into trouble if you’re picky about whom you work with. Request a list of trustworthy factoring firms from your accountant or another business partner you trust. Ask for the contact information of existing customers after chatting with each factoring business. Prepare questions and investigate the connection as thoroughly as possible.
3. Check Different Factors Like Rates and Credit Limits
Excessively cheap rates have a catch, such as monthly minimums or inactivity penalties. Look for a flexible component that will work with the ebbs and flows of your company. Don’t be misled by the vast credit limits that are being given. Receiving a credit limit that much exceeds your requirements may seem flattering, but it may be a warning flag that your proposal contains minimum monthly costs. Monthly minimum fees are often determined by multiplying your “high credit limit” by your monthly factoring charge so that your minimum factoring expenses match your credit limit.
4. Monitor Your Receivables
Maintain an eye on your aging receivables and keep track of your collections within your company’s cash flow budget. In factoring, money is valuable, and it translates to money. The quicker your collections arrive and are posted, the cheaper your invoice factoring costs will be over time. Do not make the mistake of losing track of your receivables. Nobody, not even the finest factoring business, will be as concerned about recovering your money as you are. Keeping track of your collections can help you save money on factoring charges.
When Does Accounts Receivable Financing Make Sense For a Business?
When a business needs financing fast
Getting business financing through an invoice financing partner is much quicker and smoother than a traditional loan. If you’ve spent some time in business, you know that some things cannot wait. Companies can be approved in as little as 24 hours and start financing their invoices immediately; there is no lengthy application process. Factoring approval is not based on the business’s credit score but on the customers’ credit score.
When a business doesn’t want to put a cap on funding
Invoice financing does not limit how much a business can finance; it all comes down to its volume and needs.
When a business doesn’t want to add any additional debt
A business incurs no new debt with invoice financing. Since there is nothing to pay back, the company avoids any interest rates. The business only pays for the small factoring fee pulled from the total invoice amount.