Accounts Receivable

Accounts receivable financing is something that a lot of business owners rely on. When cash flow problems start to arise, it can often be damaging for relationships with your clients if you start to call your invoices in early. Whilst some business owners will take the risk, others look into a method of financing known as invoice factoring. What happens with invoice factoring is that you as the business owner sell the invoice owed to you, to a invoice factoring company. They will pay you below face value for the invoice, but you get your money upfront without waiting for the invoice to be paid. The debtor who owes the money in the invoice will then pay directly to the invoice factoring company.

Ease cash flow concerns

If you have concerns about cash flow within your business then accounts receivable financing is something that’s worth looking into. If you’re constantly chasing up your clients because they never pay their invoices on time, it will have a big effect on your company – you’re not just wasting your time chasing them, you’re also losing out on money that you need in order to shore up cash flow. With invoice factoring the time spent chasing up debtors is reduced – the invoice factoring lender will often do that for you, since it’s to them that the sum is owed once they purchase the invoice from you.

The cost of factoring

There are several costs involved with accounts receivable financing – these are usually the service fee, which is often calculated based on a percentage of the turnover of your business, as well as the interest. Interest charges are made on top of the service fee, usually at a fixed rate. When the cost of factoring is put in a trade off with the cash flow that it allows for, it’s often a worthwhile process. If you’re unable to obtain an overdraft or any other form of financing to help with cash flow, invoice factoring is perfect. Accounts receivable financing isn’t for every business out there – it often works best for those that work on a business to business selling model – the size of the invoices has to be considerable in order for invoice factoring to work. You must also ensure that your business is offering some kind of payment terms such as 28 or 60 days for the remittance of payment. If you collect payment on invoices before goods are delivered or work is completed, accounts receivable financing is not something that your business can benefit from.