Accounts Receivable Financing: Avoiding Cash Flow Issues

You have done the work and now it is time to get paid. The problem is, having your clients pay you is not a simple matter of waving a magic wand or snapping your fingers and making it happen. One sad fact of doing business is that often you have to put some work into making sure that your invoices are collected even after you’ve delivered the product or service. This can be not just annoying but extremely problematic if you have bills piling up and you still have not been paid. Accounts receivable financing can help you get you through the crunch and ensure that you receive the money that is owed you.


Many people prefer accounts receivable financing because it is not an actual loan or line of credit but is using money that your company has already earned. It is also known as invoice factoring, with the factor playing the role of a collection agency. The factor will buy your invoices at a certain percentage depending on the stability of the customers and the likelihood that they will pay promptly. The factor will then be in charge of collecting on your invoices and will give you the remainder of the money that you are owed once it comes in while charging a fee for the service, sometimes around 4-5%. This kind of arrangement can be a boon to business owners who want to be spared the annoyance of collecting on late invoices and are willing to pay others for the service. In addition, it can be a form of emergency financing when facing a shortfall between bills that are owed and money that still needs to be paid.


The percentage the factor will pay upfront depends on the risk involved in collecting on the invoices. The factor will look at your customers and clients and see their record of repayment and how financially stable they are. This can be an advantage if you have worked with clients long-term who usually have been reliable. Based on this history, you are likely to receive a higher percentage upfront. The minimum is around 60% to 70% while the maximum can be up to 90%.


There are some who point out drawbacks to accounts receivable financing and say it can make the company look like it is in trouble or desperate. Others may say that there could be problems in the way the money is collected and could possibly damage the relationship with clients. However, many companies practice invoice factoring and it you use a factor who is considerate and efficient the way it deals with clients, the arrangement can be a positive one for everyone involved.


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