Common Accounts Receivable Financing Questions Answered

Common Accounts Receivable Financing Questions Answered

Accounts receivable financing allows companies to get loans based on their current outstanding invoices. While the invoices are used as collateral, the companies are able to potentially avoid cash flow problems and grow their business. This form of financing and cash flow management can be confusing to some, so here we’ve answered some of the most common questions we get asked about accounts receivable financing.

What is it?

Accounts receivable financing is a line-of-credit offered that turns invoices into immediate cash for companies to use as they need. Financing companies provide a percentage of the total value of the invoices up front and upon payment, the remainder (minus a fee) is issued. 

How is it Classified?

As current assets. On the books, it’s money owed to the company for services or products already rendered. This classification allows it to be used as collateral for financing.

How Does it Work?

If you have $50,000 in unpaid invoices a finance company will offer you up to $40.000 (80%) as a line of credit, using the collection of qualified invoices as collateral. Upon repayment (by your customers), the financing company will release the remaining $10,000 minus their financing fee (1-5%).

Do You Need Good Credit?

No. Financing companies examine the creditworthiness of your clients and customers, not you or the company. As long as you have qualified invoices,  you can participate in accounts receivable financing.

A/R Financing vs. Factoring 

Although they’re used interchangeably, they are not the same. With A/R factoring, the finance company buys the invoices from the company. In exchange for cash up front, they become responsible for collecting payment from your clients and customers. With A/R financing, the business owner retains the rights to the invoices. The business owner is responsible for collecting payment and the invoices serve as collateral for the extended line of credit.

Who is A/R Financing for?

Traditional loans for banks require tenure and collateral. Many small businesses have trouble qualifying for these kind of loans so this is a great, practical and convenient alternative solution for businesses who:

need cash reserves for a business opportunity or seasonal demands,
want to make business improvements, 
are expanding rapidly,
have a short term cash flow gap (30-90 days), and/or
need help with regular expenses. 

What Are the Benefits?

There are several benefits to accounts receivable financing. Some of these benefits include:

minimal paperwork,
easy application process,
no long term contracts,
eases financial planning,
flexibility of how to use finances, and 
increased cash flow.

Accounts receivable financing tends to have much higher interest rates and fees than other lines of credit and traditional loans. Be sure to carefully read over the terms and agreement; speak to a professional if you have any questions.

To learn more about accounts receivable financing, contact the team at Summit Commercial Capital.