Businesses usually work with clients who must settle their invoices in 30 to 60 days. Regrettably, some companies lack the necessary cash flow to wait for the invoices to be settled. They have to get paid as soon as possible so that they could meet business expenses and operation costs. Because of this, some companies turn to accounts receivable financing, also known as factoring or A/R financing. Find out how this process works to determine if it’s suitable for your business.
The A/R Financing Process
Let’s say that you sell various electronic gadgets and you have around $500,000 in accounts receivable from commercial clients or resellers who haven’t paid for their orders. But what if you need cash as soon as possible because you’re in the process of building a warehouse for your business? You probably know that accounts receivables are considered current assets, which means that you expect to receive any amount owed to you within 12 months’ time.
You then decide to do business with a factor or factoring company that buys your accounts receivables for $375,000. In this deal, you get $375,000 straight away, but you essentially sold the right to the $500,000 accounts receivables. Put simply, you get the money you need to fund your warehouse construction and other business expenses, while your factor assumes all the risk of your clients not paying their invoices or paying them late.
How You Could Benefit from A/R Financing
Although the entire process for accounts receivables financing could be quite complicated at first, the essential premise is that you could exchange your upcoming cash flows for cash flows right now, which is extremely practical for businesses that require cash flow at the soonest time possible. Furthermore, this could free up your time and enable you to focus on running your business, servicing your clients the best way possible, and generating new business.
Lastly, since this financing option allows you access to more cash as you grow your business, or less money if you don’t need much at a given time, you could simply ask your factor to either scale back or ramp up financing as you see fit for your needs.