career money management

Understanding Accounts Receivable Funding and How it Works

087894a15dbf45869b908297913d4669More and more small businesses are becoming interested in accounts receivable funding. Simply put, this is a financial construction that allows businesses to access funding as they need it. It is a type of credit that allows businesses to receive cash based on their sales report. Additionally, as your company sales grow, the financing model grows with it. Accounts receivable funding is particularly interesting for businesses who are refused regular loans because they don’t have a good enough credit status (yet).

How Account Receivable Funding Is Different

Receiving this type of funding is very different from regular bank loans. This is because you are not actually borrowing money. Rather, you are selling your invoice to a funding institution. It is a very fair and smart option that too many businesses haven’t heard of yet.

Simply put, when you apply for this type of funding, your credit status is irrelevant. No longer will you have to explain your debt to equity ratio. Rather, you will have to show that you believe your invoice will eventually get paid. The better the past behavior of your customer, therefore, the more likely it will be purchased.

Why This Type of Funding Is Needed

If at all possible, businesses should stay away from borrowing money. This is the same with individuals. However, for a business, this can be all but impossible. If, for instance, a customer puts in an order, this means that the business has to purchase the elements needed to fulfill that order. However, if the customer has not paid yet, for instance, because of a 30 day payment term, and another order comes in, they will not have the funds to fulfill that new order. Refusing an order, or asking customers to wait until someone else has paid, is bad business. This is where accounts receivable funding is important. Rather than having to wait for the first customer to pay, the business can sell their invoice and use that money to fulfill the order of the next customer.

This type of funding is becoming increasingly common all over the world. The exact way it works does depend from one funding company to another. Additionally, the amount you will be able to receive will vary as well. If you have a bill for a customer with a proven proper payment behavior, the company could give you as much as 98% of the invoice value, with the other 2% being their profit. However, if there is a risk that your customer will never pay the invoice and that action will have to be taken such as debt collectors, you will be offered a lot less, as the funding company will expect that they will need to invest money in actually receiving the funds as well.

It is important to look into which invoices are most likely to sell if you are considering this construction, therefore. However, an accounts receivable funding company will be more than happy to help you with that.

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