How Accounts Receivable Financing Can Help Companies Finance Invoices

Cash flow is one of the biggest issues that small businesses encounter. You may have lots of work, which is great, but if your customers aren’t paying you in a timely fashion, it can make it hard to stretch from month to month. Luckily, there’s a common solution to this common problem.

Accounts receivable financing is a funding method in which a lender assumes designated invoices on behalf of a business, giving them the cash immediately minus a fee or percentage. Once a company has set accounts receivable financing up, it can be a very easy and cost-effective way to have cash on hand. Let’s look at the process.

What You Need for Setup

Like any other form of lending, accounts receivable financing companies will start by performing their due diligence and examine key elements of your business. Once you’ve identified specific clients’ invoices you wish to finance, the financer will evaluate their creditworthiness to make sure they’re at low risk for repayment. They will look over your receivables aging report to see how long payment has typically taken historically. They’ll make sure none of your receivables have liens on the hem, and that your company’s taxes are up to date and your credit is good enough to qualify. They may also need to review your financial statements.

Select Receivables to Submit

Once you get the green light from the accounts receivable financing company, the next step is to select which clients’ invoices you want to submit for financing. Depending on the company, this may be done online, via fax, or email, with a schedule of accounts document accompanying the invoices.

Verification and Financing

The lender will then verify with the customer to ensure there are no discrepancies or misunderstandings about the invoice amounts or terms.

Payment, Settlement, and Repeat Business

Once the accounts receivable financing company has verified the invoices with the customer, they’re ready to release funds to you! First, they will calculate an advance that they hold back as a sort of deposit until they are paid. It can vary, but the industry standard is around 20%. They will then deposit your funds through wire transfer or direct deposit. Businesses generally receive funds within 1-2 business days using these methods.

Once the lender receives payment on the invoice, they will rebate the 20% deposit to your business minus their fee for the transaction. After your account is set up, you can repeat with other invoices or clients.

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