What Is Accounts Receivable Financing?

by | Nov 15, 2021 | Business Finance | 0 comments

What exactly is accounts receivable financing? This type of commercial lending is a form of funding where you will receive a sum of money from a lender based upon a percentage of your accounts receivable. There are a few different ways this can be structured, with the most common being either an asset sale or loan. Below we will look at both types of accounts receivable financing in more detail.

A problem that many small business owners face concerns invoice delays. You, of course, depend on money coming in to help you meet your financial obligations. When payments don’t go in there promptly or when customers fail to pay period, this could very well put you behind. Next thing you know, you find yourself scrambling to come up with the money that you need to meet your monthly bills.

With accounts receivable financing, you have the opportunity to get a loan based upon the amount of money that is owed —you could sell those outstanding invoices to a lending company and procure cash in that way. Some refer to accounts receivable financing as factoring. And consequently, those who purchase the outstanding invoices are sometimes known as factors or factoring companies.

Different Structures of Accounts Receivable Financing

As mentioned, among the most common forms of accounts receivable financing are either loans based upon the value of invoices or the sale of invoices to a lender or factoring company.

Sale of Invoices

Accounts receivable financing will often be structured as a type of asset sale. With this agreement, the company needing additional working capital will sell its outstanding invoices to a lending institution or factoring company. The business, in turn, receives money in exchange for this particular asset. Keep in mind. The industry will not receive 100% of the number of unpaid invoices sold as the factor will charge a fee. Though, the amount paid out could be as high as 90%.

One of the benefits here, beyond, of course, receiving much-needed cash, is that the company or lender who purchases the accounts receivable will take responsibility for collecting those invoices. This removes the task is off the plate of the small business that sold the unpaid invoices.

Loans

In some instances, accounts receivable financing will be structured as a type of loan. This means that the company does not sell its invoices, but they still receive funding based upon the value of those invoices. It then falls on the small business to collect these outstanding invoices and thus pay the loan back. Keep in mind. There are interest and fees attached, just as with the sale of accounts receivable.

Pros and Cons of Accounts Receivable Financing

Among the primary benefits of this type of financing is that you can get the money you need sooner rather than later. In other words, you are not having to wait on a client to come through with their payment before getting the infusion of money you need. The lending company/factor gets that to you in advance of you finally collecting on an invoice.

Also, because the money loaned/paid out is based on tangible accounts receivable, it works differently from a traditional business loan. There is less wait time associated and also generally less paperwork. The invoices themselves also become the security on loan, so it may be easier to qualify for than some other loan types.

Keep in mind, too, that when selling your invoices, you no longer have to worry about collecting on those accounts; that should save you a reasonable amount of time (and hassle) in the long run.

There can be some disadvantages to going the accounts receivable financing route as with any loan type. For example, the interest and fees charged could be somewhat steeper than with more traditional kinds of business loans. You’re giving up a portion of the money that you would be owed in full if collecting on the invoice on your own.

There is also the question of what this can potentially do for your relationships with customers. A factoring company, for example, may not be as cordial or patient with a nonpaying customer. Sometimes their tactics could be a bit more abrasive than how you might approach that client. There is a chance this could anger the customer and thus make it so that they don’t buy from you again. That said, if they are a customer who is habitually late in paying, then perhaps it is better to cut ties with them anyway.

First Union Lending is Here for You

If you need additional working capital, we can certainly help. We offer accounts receivable financing options, along with a number of other fast and flexible business loan programs. From Miami Beach to Dallas, Texas, we cultivate long-term relationships with our small business clients. Call today!

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