Accounts Receivable Financing – How Does It Work?

receivables financingAccounts receivables finance is a form of working capital that a business can gain access to by unlocking the money tied up in unpaid invoices.

This finance method isn’t really a form of lending per say and is considered more of an asset-based purchase, as you effectively sell invoices with it. On top of this, a small fee would be paid to the provider for the service.

Accounts receivable financing allows companies that trade with other companies to receive payment on their outstanding invoices.

A company that uses accounts receivable financing will offer up some, or all of their outstanding invoices to a lender for early payment, in return the business will receive an advance against those invoices.

What is accounts receivables finance?

Accounts receivables finance is a type of short-term funding that allows businesses to borrow against their outstanding invoices.

This can be an important source of working capital, particularly for businesses that have difficulty accessing traditional forms of financing. Accounts receivables finance can help businesses to bridge the gap between when they incur expenses and when they receive payment from customers.

It can also help businesses to take advantage of early payment discounts offered by suppliers. In addition, accounts receivables finance can provide businesses with flexibility in managing their cash flow. As a result, it can be an important tool for businesses of all sizes.

Accounts receivables financing is when a business receives funding based on outstanding invoices it has issued to its customers. Those invoices refer to purchases made, but the payment hasn’t been received yet.

From an accounting perspective, there are:

  • Accounts payable
  • Accounts receivable

An example of receivables financing is, a manufacturer supplies a customer with goods on the first of the month, the manufacturer allows the customer 30 days credit, for that period the company will have an account receivable. This is also know as trade receivables.

What are the four forms of receivables financing?

Factoring, single-invoice discounting, asset-based lending, and supply chain financing are all forms of receivables financing. Factoring is the sale of invoices at a discount in order to raise cash quickly.

All four of these types of financing can be used to improve a company’s cash flow and working capital position.

Factoring 

The key difference with invoice factoring comes from the responsibility for credit control functions. Here, the responsibility will lie with the provider, rather than the owner of the business. Therefore, factoring is more commonly used amongst smaller companies that do not want to employ a credit control specialist, or spend additional time chasing customer payments.

All financing companies and providers will offer slightly different terms, so you are advised to look around and secure the best deal for your business before signing any agreements. You see, factoring companies are increasing in popularity as time goes on and the business world becomes more open to forms of alternative finance.

Single-invoice discounting

With single-invoice discounting a business sells its invoices to a provider and gains the money they would have provided up front. This saves the company from waiting between 30 and 60 days for the customer to make payment, and instead allows them to access the cash straight away. Here, it is the business that is responsible for issuing the invoice to customers (as it normally would), and it will have to continue to chase payment if needed.

Asset-based lending

Asset based lending is a type of financing that allows businesses to borrow money based on the value of their assets. This can include things like real estate, inventory, and accounts receivable. Asset based lending is often used by businesses that have difficulty qualifying for traditional loans, such as startups or companies with bad credit.

One of the benefits of asset based lending is that it can provide a business with much-needed capital without requiring collateral. This can be helpful for businesses that do not have the equity to secure a traditional loan. Another benefit is that asset based loans are typically easy to obtain.

As long as a business has eligible assets, they will usually be able to qualify for this type of financing. This can be beneficial for businesses that need quick access to capital. The downside of asset based lending is that it can be expensive. The interest rates on these types of loans are often higher than those of traditional loans, so businesses need to be aware of this before taking out an asset based loan.

Overall, asset based lending can be a helpful tool for businesses in need of financing, but it is important to understand the pros and cons before taking out this type of loan.

Supply chain financing

Supply chain financing is a type of financial arrangement that can provide companies with working capital to cover the cost of their raw materials and other production expenses.

In most cases, the financing is provided by a bank or other financial institution, and the company repays the loan plus interest over time. There are several benefits to using supply chain financing, including the ability to free up cash flow, improve supplier relations, and reduce production costs.

In addition, supply chain financing can help companies manage their risk by spreading out their payments over time. As a result, it is an increasingly popular tool for businesses of all sizes.

How does accounts receivables financing work

Accounts receivables financing works by when a company sells goods or services to a customer, they do so by extending credit. This means the customer will not be required to pay until a later date. Of course, this type of financing is convenient for the customer and benefits them greatly.

However, this can be harmful to a supplier that are struggling with cash flow levels because they are waiting patiently to be paid. This in turn makes it difficult for a business to grow as funds are essentially being held back.

Receivables finance is a direct solution to this issue. It enables early payment of invoices, meaning as a company provides a service, it can be paid on time despite when the customer intends to make payment. This puts businesses in a better position to move themselves forward and make further purchases if necessary.

If your outstanding invoices are the thing that’s holding you back from developing your business and maintaining a healthy cash flow, you should consider receivables finance today. You will receive payments much faster and have access to the funds that will afford your company a brighter future.

Benefits of accounts receivable financing?

Accounts receivable financing offers the following benefits for businesses facing cash flow challenges:

  • Quick approvals usually about seven days
  • Security is not needed
  • Minimal paperwork and easy application process
  • Not ties into a long-term contracts
  • Helps with cash flow and eases financial planning
  • Flexibility to choose which invoices to fund amount of financing

Companies should be aware that the fees and interest on accounts receivable financing may higher than other lines of credit. When choosing an account receivable financing provider it is important to learn about their rates and ensure the fees.

Eligibility Requirements

To be eligible to receive accounts receivable financing, the following requirements are needed:

  • Must issue invoices on a B2B basis
  • Traded for at six months
  • Have a minimum turnover of £100,000
  • Be UK Based and deal with other UK based businesses
  • Deal with other creditworthy customers

Most accounts receivable financing companies will check the business credit rating of your customers. Having a strong customer repayment history is a good indicator that you will be eligible for this type of funding.

Apply for receivables financing

Applying for receivables finance is quick, fast and simple, simply complete the online enquiry form to the right of this post or complete the contact us enquiry form.

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