What is Accounts Receivable (AR) Financing?
Accounts receivable financing is when a business sells its AR (accounts receivable) to a factoring company and receives short-term business funding in return. The process is a speedy and efficient way for a company to receive working capital without going the near impossible route of obtaining a bank loan. The company can get up to 90% of the invoice amount advanced to them. Receivable financing is a great way for the unbankable to obtain business funding fast.
The factoring company looks at the credit of the companies client, not their own credit. As along as the company looking to sell their invoices are doing business with solid, credit worthy clients, AR funding is a great option. Businesses that have IRS issues, client concentration, startups, minority owned businesses and other challenging funding situations benefit greatly from accounts receivable financing. These companies should be making $25,000 or more per month in revenue to be approved for AR financing. Keeping in mind that the company can be making less, but if the accounts receivable funding package creates a situation where they will be bringing in $25,000 or more that qualifies them as well.
Uncollected invoices have been purchased and sold for some time in the history of business funding. It is more effective than ever and is an excellent option for many companies in all types of industries including staffing, oil and gas, medical and many more. Selling unpaid invoices is a way for a company to immediately get the cash they need without having to use their assets as collateral, which might occur with a loan. Traditional loans put a company’s assets at risk if the company is not able to repay it.
Once the invoices are sold to the factor, the factoring company handles all of the collection duties with a soft touch. For obvious reasons it’s important to keep good ongoing relationships with all parties involved. A factoring company should not be an aggressive ‘collection agency’ but a valued business partner.
A business may use AR financing to purchase much needed inventory, equipment, raw material, cover operational expenses or meet payroll. It can also be used to grow and expand the company in a myriad of ways. The working capital might include funding additional product lines or paying for bigger advertising campaigns.