Accounts Receivable Financing Basics

You may know accounts receivable financing by another name: Factoring. This type of financing allows the owner of a business to receive capital for services unpaid on an invoice. Unlike loans, this type of financing is not borrowing against collateral. Instead, it is the sale of an asset.

 

Basics of AR Financing

 

To put it simply, AR financing takes your company’s accounts receivables and turns them into cash. For instance, say you have a certain amount of money in receivables. You would send those invoices to the lender and the lender will give you a percentage of those invoices. Normally this high percentage depends on a variety of factors. The lender will hold onto the invoice and you hold onto the percentage paid by the lender. When the customer pays the invoice, the lender will pay you the balance as it remains, subtracting the lender’s own fees, of course.

 

Types of AR Financing

 

There are different types of accounts receivable financing available to businesses of all sizes. Here are five of these:

 

  • Single invoice factoring
  • Asset based lending
  • Inventory financing
  • Purchase order financing
  • Accounts receivable

 

When talking to a lender, you can find out which of these different types of financing will work best with your business. Continue for simple explanations of each of these finance options.

 

  • Single invoice factoring: when you can advance the payment of your customer’s pending purchases
  • Asset based lending: any business loan where your financing is secured by collateral.
  • Inventory financing: allows a business to obtain revolving line of credit while using inventory as collateral
  • Purchase order financing: a secured type of loan to pay inputs
  • Accounts receivable: when you sell the purchase orders for cash

 

Is Accounts Receivable Financing for You?

 

Now that you know what type of financing this is, it’s time to ask yourself if it would benefit you. This is a valuable form of financing when your business receives a contract for products or services but has less cash flow. When you utilize this type of lending, odds are you will have lower interest rates and will save more time. Check with a professional lender before making any decisions regarding your financing options.

 

When it comes down to it, AR financing helps businesses. Limited cash flow makes it difficult for a business to stay afloat, much less for that company to be able to expand. This is why these financing options are helpful.

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