Most business owners experience a low cash flow in their business, and there are ways besides bank loans that can eliminate that financial stress. You can implement alternative sources of financing in a lot of ways depending on your business needs and circumstance. One of the excellent options of financing is accounts receivable funding. This article will provide essential details on accounts receivable funding.
Understanding Accounts Receivable Funding
This financing technique involves selling your invoices to a factor (service provider) while receiving short-term financing in return. It is an efficient and quick way of securing your working capital. However, the lender will examine your credit score, debt and cash flow before approving your application. The factor will use your invoices as collateral against the cash you receive in advance. The advance payments may be a credit line or a lump sum.
There are various kinds of accounts receivable financing structures, such as asset sales and loans. This funding option can be a structured asset sale. In this agreement, you sell your accounts receivables to the factor. In regards to the terms, your financier might pay up to 90 percent on the outstanding invoices’ value. Accounts receivable funding could also be structured as loan agreements. Your business gets an advance in regards to the balances of accounts receivables.
Applying For Financing
You first have to apply to a lender to receive funding. You will have to provide general details about you and your business, such as contact information. The lender will then ask you to submit your invoices to check if you qualify for financing. The factor may then approve your application on the same day or after a few days if you are eligible. You will then get a line of credit to offset your business expenses. In most cases, the lender will deposit funds in your business account within a day or two. Finally, you will collect your payment and start repaying the loan from the credit line.
The most significant merit of accounts receivable financing is you immediately get the cash. Moreover, the requirements are less stringent than conventional loans since the invoices act as collateral. You could also use this financing to purchase necessary raw materials, equipment and inventory for your company.
Ensure you put all your documents in order and establish a business entity before applying for accounts receivable funding. This method of financing may allow your business to grow since it improves cash flow, and you can use the funds to purchase necessary equipments and raw materials.