Account Receivable Financing: A Common Business Transaction

A problem that many businesses have are slow to pay customers. When products or services are delivered to a customer, often times the customer may receive a invoice for the services or products that have been delivered. These invoices will require payment. While most businesses eventually receive payments for these invoices, slow to pay customers can cause businesses a great deal of financial difficulty. Many times, business capital is tied up in the resources that it took to provide the products or services. Invoice payments are there to help the business have the capital to continue. When invoices aren’t paid in a timely fashion, this can put a business in a very tight spot from a financial standpoint.

Fortunately, with account receivable financing, a business can turn a negative into a positive. With this type of financing, a business can use outstanding invoices as a way to secure the cash that is needed to continue operations.

For example, if a business has an outstanding invoice for $10,000, they can take this invoice and leverage the money owed to the business to a factoring company that will provide a factoring loan. In most instances, a loan for a $10,000 invoice will usually be around $8000. There are times where invoices can be leveraged for up to 90% of their total.

Once the loan is granted, the business that owns the accounts receivable will pursue the invoice owner for payment. There are times when the factoring company also handles the collection duties as, in some factoring agreements, the factor actually owns the invoice. Once the invoice is paid, the loan plus any fees that the factor charges and interest on the loan will also be repaid to the factoring company.

For people who have never heard of this type of financing, it may seem a bit strange or even risky. However, factoring is something that many businesses do. In fact, both small and large businesses routinely use factoring as part of their business model. This helps the business have the needed funds, even if they are dealing with slow to pay customers and clients. While this can cut into profits a bit, if a business is having problems drumming up cash to keep the doors open, sacrificing a bit of profit is better than the business shutting down for good.