Selling goods and services on credit is standard practice. Business payments are often structured on net terms of 30, 60, or even 90 days.
Selling on credit empowers your customers to make purchases and puts revenue on your books. But revenue on your books is a bit different than cash in your pocket. To pay workers, purchase inventory, and fund short-term operations, businesses often need cash before receivables are due.
The good news is, outstanding accounts receivables (AR) can be used to qualify for financing and quickly access capital to boost liquidity.
Two methods of AR financing
Outstanding collections are non-cash assets, but assets nevertheless. Therefore, they are valuable to lenders and can be used as collateral for financing.
Accounts receivable financing is generally structured as an asset sale or as a loan.
Accounts receivable asset sales
A company can sell its outstanding invoices to a third-party financing company, often called a factoring company. This arrangement is known as AR factoring or invoice factoring.
At the time of the sale, the business receives 80% to 95% of the outstanding invoice. The factoring partner then takes responsibility for collections and remits the remaining amount minus their own fee following successful collection.
This option offers flexibility, with finance recipients able to choose which invoices they want to sell to the factoring company. Factoring approvals are quick, and companies can receive capital in 2-3 days.
Accounts receivable loans and credit
AR financing can also be structured as a loan by borrowing against outstanding receivables. This may be referred to as invoice discounting or invoice financing.
The company seeking financing receives an advance based on the value of outstanding receivables. The amount must be paid back with interest.
With an AR loan, the finance recipient remains in control of their accounts receivables and is responsible for collection when invoices come due. However, they must turn over all balance sheet account receivable details for the financing company to determine the line of credit to extend.
Which is best for my company?
There are pros and cons to both methods of AR financing.
The most important difference is that under AR factoring, the factoring company takes control of collections.
Consider whether your business could benefit from shifting the responsibility of collections to a third party. By ceding collections obligations, your company may be able to save time, labor costs, technology spend, and other expenses associated with collections. This gives you more time to focus on running your business, rather than chasing payments.
Also consider the cost of financing. Fee structures vary according to the value of your outstanding receivables, the age of invoices, and the expected difficulty of collection.
With factoring, fee structures are straightforward and recipients are charged a fixed fee between 2% and 7% of the total value of purchased invoices. Since invoices are sold, there is no need to take on debt to access capital.
With a line of credit or a loan, the recipient borrows on interest. This is often a sliding interest rate that increases each week outstanding balances remain unpaid. At a minimum, the finance recipient will take on some short-term debt.
Technology integration makes AR financing more accessible
Fueled by technology developments, AR financing is becoming more accessible and widely used. For example, with a factoring platform that integrates to digital order systems, companies can sell their invoices and receive financing as a simple extension of the order process.
AR financing is an ideal option for businesses that are unable to qualify for traditional financing or simply cannot wait for the drawn-out process of applying for a bank loan.
If your business needs a capital boost to pay expenses, invest in technology, or expand operations, consider whether AR financing may be right for you.
To learn about more financing options that can give your business a competitive edge, visit Inxeption Capital or give us a call at 888.852.4783.