Understanding Accounts Receivable Financing

Having liquidity – the necessary funds to pay suppliers, employees and regular business expenses is critical the success of a business. However, getting business financing has always been a challenging proposition for business owners. And given the current credit environment, obtaining a business loan is very hard. Banks and corporate finance companies are only providing business loans to large corporate clients that have substantial assets.

Liquidity problems are very common for companies that sell to other businesses. In the business to business environment, it is common to offer 30 to 60 days to pay an invoice, especially if your client is a large company. This creates a substantial cash flow problem, since you need to spend money to service your client and then wait to be paid.

There is an alternative. Let’s suppose that you could get 80% of your payment immediately upon delivering your product/service, with the remainder after 30 to 60 days. Would that help your business? Would that provide the necessary cash flow to pay rent, employees and suppliers? A more important question is, would you feel comfortable taking new business if you knew you would get paid quickly?

Accounts receivable factoring can provide the solution. The proposition is simple. You get an 80% advance on your invoices as soon as the work is completed. You receive the remaining 20%, less a small fee, once the invoice is fully paid.

One big advantage of factoring receivables is that it’s easy to obtain. The biggest qualification requirement is that you do business reliable customers. Aside from that your company must be free of liens and judgments. Generally, the set up process takes about a week and after that you can get funding within a business day of submitting a request.

Factoring rates vary and will be based on the quality of your clients and the amount of financing you need. Generally the monthly costs will be between 1.5% and 3% depending on these variables. As rule of thumb, factoring can work well if profit margins are at least 15%.

Receivables factoring provides a great solution for a specific problem – the gap generated between invoicing for services and receiving payment. If you have clients that take up to 60 days to pay, and you need financing to cover business expenses, factoring is a good alternative to conventional business loans.