A Guide to Accounts Receivable Financing

When businesses provide services to their clients, they know that they will receive payment. However, sometimes clients will not pay their bills until over a month after the services were rendered. For larger companies with established lines of credit and lots of savings, this may not be a problem, but small or new businesses may struggle. When businesses need money and cannot wait for the outstanding payments, they can use accounts receivable financing.

The term “accounts receivable” refers to invoices for jobs that a company has completed and needs payment for. While clients’ payment probably cannot be rushed on short notice, the company can access part of the money ahead of time by selling these invoices to a third party, known as the factor. The factor then gives the company most of the money that is due from the invoices. When the clients pay the invoices, the factor keeps a percentage of it and gives the company the rest of the money.

Before using this kind of financing, businesses need to consider how much money they will gain. First, they should find out what percentage of the invoices the factor will provide immediately and what the factor’s fees will be. Percentages may vary depending on the business’s size, the factor’s size and the value of the invoices. While some businesses may have the time to consider different potential factors, companies that need financing as soon as possible may not have many choices.

Another key consideration with accounts receivable financing is budgeting. The company needs to make sure that receiving early payment for the invoices will not affect future parts of the budget. For example, the money for a set of invoices may have been intended for a monthly bill. Companies should remember that they will receive another portion of the money from the factor at the time when the client was originally supposed to pay.

This type of financing has many benefits for businesses. Companies that use it do not have to go into debt, which involves interest and can last for years. The process also has no effect on businesses’ credit scores. Additionally, it provides money that can be used for any expenses that companies have, including wages, supplies and bills. Even if a client pays his or her bill late, the business still receives some of the money early.

Surviving financial difficulties requires financial flexibility and creativity. Businesses can use accounts receivable financing to relieve some of their financial pressures.

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