Accounts receivable factoring or accounts receivable financing is a tool used by many companies that understand the value of converting invoices for goods or services to working capital. There are several key benefits of accounts receivable factoring, including:
- The company receives immediate cash
- The company’s credit is not used
- Financing can be adjusted to meet the company’s needs
- The company does not incur debt
- Alleviates pressure from slow paying customers
Sounds ideal, right? Let’s take a look.
How Accounts Receivable Financing Works
With accounts receivable financing or factoring, a business sells its invoices to a third party or a factoring company in exchange for immediate cash. As soon as the invoice is submitted and approved, the company receives funds from the factoring company. The balance of the invoice is paid in full minus a small fee when the factoring company collects the total amount due from the business’s customer. Factoring is designed to alleviate cash flow delays so the invoicing company can refill inventories, make payroll or other business-related expenses.
Companies across a wide range of industries turn to accounts receivable financing so they do not have to borrow to meet their day-to-day operations. Companies should still have defined accounts receivable policies and might reward fast paying clients with an early payment discount. But, on the whole, many companies do not have a collections department, let alone want to spend time chasing old invoices from work that was completed 30, 60 and 90 days ago.
Accounts receivable financing shifts the burden of collections to the factoring company and allows the business to do what they do best without the fear of slow-paying customers threatening operations.
The sequential order of accounts receivable financing keeps the company’s focus on providing the work, goods or services to their customers. When the work or service is completed, the company generates an invoice and forwards it to the accounts receivable financing provider (or factoring company) which initiates the same day advance.
Once it accepts the invoice, the factoring company takes responsibility for collecting payment. The efficiency of the service relieves the selling company of the pressure of slow pay customers and collections and converts 30, 60 or 90-day payments into immediate cash.
Accounts receivable financing providers usually will customize their services to meet the individual business’s needs. Receivables financing providers do charge a small fee but in the grand scheme of business, the fee is well worthwhile when slow paying customer accounts are immediately deposited.
Accounts receivable financing is contingent upon the customers’ creditworthiness and payment history — not the business seeking the cash advance. The factoring provider usually deposits funds electronically so this is often the fastest way to get paid for good or services rendered.
Your Accounts Receivable Financing Provider Is Your Partner
In many respects your accounts receivable financing provider is your partner, providing the credit analysis and risk assessment that allows the selling company to proceed with new customers with confidence. Your business will also receive online records of all transactions and invoices.
Accounts receivable financing is easy to start. The factoring provider will discuss your receivables and your customer base. The provider will then provide a quote that includes their underwriting guidelines and will customize their program to meet your needs. Usually, written approvals can be received within one hour.
The provider will review their agreement with your business so there are no misunderstandings. They will also review your invoicing policies. It really is as simple as that. Once your line is established, you are ready to go and start receiving immediate cash for work performed.
It is important to choose a factoring provider that is as dedicated to your success as you are. Your accounts receivable financing company must understand your business and your customers.
Almost all industries use accounts receivable financing. If turning your good work into cash can solve loose ends and improve your operations, contact Interstate Capital today.