A/R financing is a financing program in which a business sells its accounts receivables to a factoring firm and gets short-term business funding in return. The financing process is quick and well-organized approach for a business to get working capital without going through the nearly impossible way of acquiring a bank loan. The business can acquire up to 92% of the invoice amount advanced to them. Accounts receivable financing is an excellent way for the unbankable to get business funding quickly.
Perks of Accounts Receivable Financing
The major benefit to this type of financing services is to assist small businesses get quick cash. It is particularly helpful for businesses that get paid large amount of invoices by their customers that may pay slowly for whatever reason (such as big corporate clients, or when part of a huge multi-phase government settlement). However, in the interim that small business still has a payroll to fulfill — putting the business in a cash flow truss.
With accounts receivable financing, you can free up the working capital you need immediately. Due to the fact that lots of businesses have funds engaged in stock and inventory, getting paid for invoices quickly is important. Getting funding for business takes that fear out of the picture for small businesses.
Invoice factoring is a process where you actually sell the invoice completely and the factor takes over the collection, can get rid of the problem of chasing down the payments from your customers.
What Accounts Receivable Financing and Factoring Costs
Similar to some other sort of financing or loan, you will pay for the opportunity of getting access to quick cash. Invoice factoring fees can range from 1-3% every month. The rate you’ll pay based on the amount of transaction, your monthly volume and your creditworthiness. The costs will even depend on whether you are getting invoice factoring financing or accounts receivable financing.
Is It Right For My Business?
AR financing lenders often focus in a particular industry or kind of transaction, for example, staffing services industries or government agreements. While searching for financing, take a look at their website or ask if they manage transactions in your specific industry or of your kind.
Think about your reasons for requiring quick funding. Is it a short-term problem? If not, it is probably indicative of something bigger that desires to be addressed. AR financing isn’t designed to buy time to keep from the foreseeable.
How much are you inclined to pay for the privilege of getting access to cash quickly? Basically, accounts receivable financing is similar to dropping your prices. However, it might be worth it if it keeps your cash flow consistent and uninterrupted. You actually need to look at the big picture and the full impact. Discuss with your accountant to know the overall financial impact on your business.