Accounts Receivable Financing – How Does It Work?

receivables financingReceivables 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 receivables finance?

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.

Types of receivable finance

what is receivable financingThere are two distinct types of receivables finance, both of which you need to be aware of.

Invoice discounting

With 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.

Invoice 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.

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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