A balance on accounts receivables (AR) is the amount of money owed to a company for goods or services delivered but not yet paid for by customers.
Accounts receivable financing provides businesses with short-term capital to handle issues that arise from AR, such as cash flow problems and costly interest on credit. Meanwhile, accounts payable (AP) is the balance of money owed by a business to suppliers for materials and services.
Accounts receivable financing can be a powerful tool for companies and other small businesses. But first, it’s essential to understand the most basic information about it.
Here’s what you need to know:
What is Accounts Receivable Financing?
The business has a lot of options for financing. The most common ones are equity capital, debt financing, and accounts receivable financing. In accounts receivable financing, a business either sells its accounts receivable to a third party or uses a factoring company as a middleman to collect the payments from their customers.
Factoring has been around for a long time. In fact, it has been used for years by prestigious companies like General Electric and General Motors. It’s an excellent avenue for businesses to maximize their cash flow and liquidity.
How Does it Work?
Companies that sell their accounts receivable to a third party or use a factoring company as a middleman are called “factors.” The factoring companies are often not banks. The business selling its receivables is called the “debtor.”
The debtor typically delivers the invoice to the factor when the goods are delivered to the customer. By doing this, after the invoice has been reviewed, the factor takes payment from the customer for the invoice.
The factor then pays the debtor for the invoice plus a percentage, typically 1% to 2% of the invoice. The factor generally makes the payment for the invoice within 24-48 hours.
A factor will typically factor in receivables up to 90% of their value. This means that the factor keeps 10% of the money owed to the business. The factor may take this amount as a fee, interest, or a combination of both.
What is the Purpose of AR Financing?
There are several reasons why businesses may choose to sell accounts receivable.
First, accounts receivable financing allows businesses to get paid immediately. This can be advantageous for growing businesses that are facing cash flow issues.
Second, the process of accounts receivable financing saves time. Firms don’t have to get involved in collections. Instead, they get the payment straight from the factor.
Third, by using accounts receivable financing, firms don’t have to pay interest.
Fourth, accounts receivable financing can be used to help the business complete other types of financing.
Who Uses Accounts Receivable Financing?
Any company that provides goods or services can benefit from factoring. They can also benefit from selling their accounts receivable. It doesn’t matter if you’re manufacturing, wholesaling, or retailing. It doesn’t matter if you’re a Fortune 500 company or a company that’s just starting up. You can use this financing to meet your short-term business needs.
Accounts receivable financing helps growing businesses overcome challenges in their cash flow by giving them immediate access to cash. The process of selling accounts receivable helps firms get paid immediately. This is hugely advantageous for businesses with cash flow challenges.
Porter Capital offers working capital solutions to businesses all over the country in a variety of industries. As a direct lender and factoring company, we provided over $6 billion in funding since its inception. If you are interested in working with us, whether it’s accounts receivable financing or something else, apply today to get started now!