What is accounts receivable financing?
Accounts receivable financing is simply a way to convert your outstanding invoices into working capital to support a business’s operational expenses or growth initiatives. This type of financing allows businesses to commit invoices to a funding partner and receive immediate funds, instead of waiting 30 to 120 days for payment. This allows companies to access cash that is tied up in unpaid invoices. When a business works with a financing partner, it receives a percentage of the total amount immediately, which can be up to 90%. The remaining balance is paid after the invoice is fully settled, minus a small fee. It’s a common and useful financial tool for companies seeking to improve cash flow and maintain operations smoothly.
Myth 1: Accounts receivable financing always has high interest rates
Accounts receivable financing doesn’t always have high rates. This myth stems from the misconception that all lenders charge exorbitant fees for this financing option. In reality, rates for accounts receivable financing can vary depending on the lender and the factors that are evaluated including the creditworthiness of your customers, the volume of invoices being financed, and the term length. Some lenders offer competitive rates that are comparable to other forms of business financing.
Myth 2: Accounts receivable financing is only for struggling businesses
Accounts receivable financing is not just for businesses in trouble. Many successful companies use this financial tool to improve cash flow and accelerate growth. It is a common misconception that only struggling businesses turn to accounts receivable financing. In reality, businesses of all sizes and industries can benefit from this service.
Businesses can use this service anytime immediate cash is needed. For example, a staffing company may utilize invoice factoring to access immediate funds to grow and take on larger contracts and a manufacturing company may use the funds to purchase inventory to fulfill a large order. Many startup businesses use accounts receivable financing when they receive their first large order from a big-box retailer, instead of waiting on payment. AR financing can help struggling businesses but many companies in a growth or expansion phase also use this financing solution.
Myth 3: Accounts receivable financing is complicated and time-consuming
Accounts receivable financing is actually a simple process that involves using your unpaid invoices to get immediate funding. By working with a financing company, you can quickly access the money you are owed without waiting for your customers to pay. Many financing partners can provide funds in a matter of days and the process tends to be far less complex than applying for a conventional loan. The whole process is designed to be efficient and straightforward, letting you focus on your business rather than worrying about complicated financial issues.
Myth 4: Accounts receivable financing hurts customer relationships
While some may worry that using accounts receivable financing can strain relationships with customers, it can actually strengthen them. Working with a reputable financing partner that understands the importance of professionalism and great customer service is important. Most customers focus on the products or services they are receiving, and many don’t notice that their invoices are being handled by another party. This is especially true if the transition is seamless and does not impact their experience. Using AR financing allows businesses to focus more on their core operations and customer service, which can lead to stronger relationships.
Myth 5: Accounts receivable financing is only for large corporations
Accounts receivable financing is not exclusive to large corporations. Small and medium-sized businesses can also benefit from this financial solution. In fact, it can be a valuable tool for businesses of all sizes looking to improve cash flow and access working capital. Even startups in the growth or expansion phase can use AR financing to take on larger orders and clients. Don’t be misled by the myth that accounts receivable financing is only for big companies; it can be a practical option for businesses seeking financial flexibility.
How accounts receivable financing works
Accounts receivable financing is a way for businesses to access funds quickly by using their outstanding invoices as collateral. Here’s how it works:
- A company sells its goods or services to a creditworthy business.
- The company presents its invoice(s) to a financing partner.
- The financing partner then advances a percentage of the invoice amount to the company upfront, typically around 80-90%.
- Once the invoice is paid by the customer, the remaining balance, minus a small fee, is returned to the company.
This process allows businesses to improve their cash flow, manage their working capital more effectively, and focus on growth opportunities.
Benefits of accounts receivable financing
Accounts receivable financing can provide your business with a consistent cash flow by converting outstanding invoices into immediate funds. This can help you cover operational expenses, invest in growth opportunities, and manage unexpected financial challenges efficiently. Additionally, this financing option can improve your credit standing by reducing outstanding debts and enhancing your financial stability. It also enables you to focus on core business activities without worrying about late payments or cash flow interruptions.
Factors to consider when choosing a financing option
Transparency is key – make sure you understand all the terms and conditions of the financing agreement, including the rates and fees, before committing. Evaluate the flexibility of the financing option. Customer reviews and reputation are important factors to consider, as well as how long the financing partner has been in business. Ultimately, it is important to choose a financing solution that aligns with your timeline, business’s cash flow needs, and repayment capabilities.
Discuss AR Financing Options with Porter Capital
If your business is considering accounts receivable financing, one of the Porter Capital team members can walk you through the process and ensure all of your questions are answered. Apply now for same-day financing for your company, or call 1-888-865-7678 to learn more.
