Working Capital

Accounts Receivable Financing: A How-To Guide

how does accounts receivable financing work

As a business owner, there’s only so long you can suffer the unfortunate business challenge of customers that don’t to pay on time. There’s a point to which you can be friendly. Beyond that, it’s time to start getting real. You need money. Despite how desperately you need extra cash, you don’t want to upset your business partners. You still need their orders. That’s where invoice factoring comes in. But just how does accounts receivable financing work?

By factoring receivables, you can find the cash your company needs without having to upset the applecart with your clients. Invoice factoring can be an incredibly helpful tool to have in your back pocket. This is particularly true for businesses that find themselves in need of additional cash flow. But how are you factoring receivables, and are you doing it right? Here’s how you can factor your receivables properly and get the cash your company requires.

What Is Accounts Receivable Financing?

Accounts receivable financing is a way to fund your business by financing unpaid invoices from customers that pay on net terms. This practice, also known as invoice factoring or just “factoring,” allows a small business to use its accounts receivable as collateral to obtain the funding it needs. 

When SMBs require fast working capital to bridge a cash flow gap, accounts receivable financing can offer a convenient, low-cost option for businesses. Another benefit to factoring is that it is faster than a traditional bank loan, and doesn’t require a lengthy business or credit history.

How does accounts receivable financing work? Like this: A small business provides its existing, outstanding receivables to a third-party lender (known as a factor), who then advances up to 100 percent of the invoice value in exchange for a predetermined factoring fee. (Your receivable funding agreement has all the details, including receivable financing costs).

In return, the small business receives quick, easy cash flow on its terms. The business owner can fund one or multiple invoices, and enjoys having funds deposited directly to their business bank account within days.

For help with cash flow management, check out our Ultimate Cash Flow Guide. It contains everything you need to know about the ins and outs of cash flow, including how to make sure your business financing and business funding goals are met through smart cash flow management strategies.

Why Should I Finance My Receivables?

If you read our definitive guide to accounts receivable factoring, you should already have a clear understanding of how does accounts receivable financing works and why you should factor your receivables. Just in case you haven’t had a chance to give it a once over, let’s take a look at a brief recap on what you need to know.

The first step to factoring your receivables is understanding what it is and why you’re doing it. Most businesses look to accounts receivable factoring due to difficulty getting their customers to pay promptly. Net terms can be an attractive way to secure a big order from a client. (Not to mention, many small businesses are often at the mercy of their clients’ payment terms). However, once you’ve completed that big order and spent cash on inventory and shipping, it becomes a different story.

This story is all too common for many small businesses. Net terms can easily put companies that are doing good business in financial straits. This can do more than upset your bottom line. It can mean not being able to fund your next order, make payroll, delayed business growth, and worse. What do you do?

By the time most businesses realize they need additional capital, it’s too late to get a traditional loan or line of credit. To make matters worse, traditional bank loans are difficult to qualify for and have an application process and approval process that can take months. While you can put some business expenses on your business credit card or use a cash advance to a cover cash flow shortage, it’s an expensive option and doesn’t always provide you with enough funding. On the other hand, accounts receivable factoring is a quick and effective way for businesses to secure the working capital they need to take on new business opportunities and meet their financial obligations. Funds can often be received in just a few business days, and small businesses don’t have to worry about it affecting their credit score.

This all sounds great, but it’s important to understand what you need for accounts receivable factoring, if it’s right for you, and how does accounts receivable financing work.

What Are the Benefits of Accounts Receivable Financing?

One of the biggest advantages of accounts receivable factoring is that it allows business owners get paid on their terms. There’s no more waiting 30, 60, or even 90 days for payment. Accounts receivable financing companies provide access to a working capital solution within days of submitting an invoice.

Businesses access the funding they need

Tech-enabled, flexible factoring lets business owners take control of their cash flow. A person can upload outstanding invoices, receive approval, and receive funds within days. A business can choose to fund one or multiple invoices all at once, for outstanding customer payments ranging from less than $5,000 to amounts well into the six figures. It can then use that money to meet seasonal demands, scale, or simply cover day-to-day expenses.

Save business and customer relationships

Financing your accounts receivable allows your business to maintain positive relationships with your new and existing customers. While the process allows a company to access capital quickly, it also allows them to meet the generous net terms required by a client. Additionally, you no longer need to worry about tracking down outstanding payments from customers.

Focus on core business 

One of the most annoying aspects of net terms goes beyond the inconvenience of late payments. On top of missing out on money owed to your business, you must now spend valuable time tracking down your payment. A business owner could better use this time managing their business. When small business owners sell existing invoices to a third party, they no longer have obligations to the outstanding debt. The factoring company takes on the collection process.O

How Does Accounts Receivable Financing Work? Am I Factoring Receivables the Right Way?

Is your business finding itself strapped for cash as a result of one-sided net terms? In that case, invoice factoring (aka invoice funding aka accounts receivable financing) can be your best option for getting your cash flow issues sorted out. The good news is that factoring receivables is easier than ever. Thanks to the rise of the internet and the prevalence of online banking, working capital is now just a couple of clicks away.

Proprietary online invoice financing platforms streamline the process of applying, getting approval, and getting funded. The first step is to create an account with your preferred accounts receivable factoring partner. The right partner will offer you a fair price for factoring, and work with you to provide the best service and guide you through the process. No matter who you choose to work with, creating an account should always be free and require no obligations or added financing fees for the privilege of doing business with you.

No Credit? No Problem!

You might wondering if you can get accounts receivable financing with bad credit or poor credit. But, like a line from a cheesy used car dealer — no credit, no problem — it’s also one of the advantages of how does accounts receivable financing work. Because you’re getting paid based on existing invoices for which you’ve already provided goods or services, your business credit rating isn’t, and shouldn’t, be relevant to the process. A factoring company is more interested in the creditworthiness of your customers than your own personal credit history.

Plenty of businesses, especially those in their startup phase, often don’t have the time in business and business credit scores necessary to qualify for bank loans. Accounts receivable financing allows your business to be advanced capital based on business sales, not your business credit history. What’s more, a personal credit check is never required, so you should never have to worry about invoice financing affecting your credit score.

How Does Accounts Receivable Financing Work?

Once you’ve set up your account with the accounts receivable financing provider of your choice, the rest is a matter of uploading your invoices and saying, “Money, please!” The entire setup process can be completed from start to finish in as little as three days, although the average setup process is about one week. Once the initial setup and verification of business and tax documents is complete, you’re ready to fund invoices and get paid.

After you’ve completed your setup, it’s just a matter of clicking the “request funding” (or similar) button. After you’ve requested your funds, money can be deposited to your account in as little as one day. At FundThrough, we even offer an Auto-Fund feature that allows you to begin the funding process for select customers automatically. No more manual requests every time you want to fund an invoice! (There are also no long-term contracts or processing fees!) This is all a far cry from the hassles and time it takes to be approved for a commercial bank loan or through the Small Business Administration (SBA).

How to Finance Receivables

To summarize, these are the steps you need to take to finance receivables the right way and get paid fast.

1. Collect all of your outstanding invoices. At FundThrough, we make it easy to keep track of unpaid invoices thanks to our integration with many popular accounting softwares including QuickBooks and Enverus. 

2. Create your account online. Remember, it should always be free to create an account. You will need to supply some basic business details and documentation, including articles of incorporation, business bank account, and tax status. 

3. Upload your invoices. Within the invoice factoring platform dashboard, you’ll select which invoices you want to submit to fund. 

4. Get approved. Funding decisions are often made in just a few days. 

5. Get funded. Funds are deposited directly into your account. Now, get back to work building and growing your business!

That’s it – it really is that simple. If you’re tired of waiting around to get paid while your clients enjoy net payment terms, it’s time to turn things around. By understanding how does accounts receivable financing work and factoring your business’ receivables, you can get paid for your invoices now. Create your free FundThrough account to get started and see if you qualify.

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