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Accounts Receivable Financing FAQ

ID-10079487Extending credit to customers can be beneficial for vendors and the client (especially the client.) Because customers do not have to pay for their goods or services immediately, they can purchase things more quickly, but wouldn’t it be great if you could collect payment upfront before delivery is made? Waiting on invoices can put a crunch on cash flow, especially if you have clients who are not paying on time. What is a business to do? One option is accounts receivable financing, a service that can get you the cash you need immediately, and here are some frequently asked questions about this process.

What is Accounts Receivable Financing?

Accounts receivable financing allows businesses that extend credit to customers to sell those invoices to a financing company for immediate cash, provided the goods and services have already been delivered. The company pays you a large portion of the invoice—typically at least 75 percent—minus a financing fee that depends on various factors. At this point, the financing company collects the invoice from your customer and forwards the balance.

What is the Cost?

There is no one set cost across the board, though fees tend to be somewhat similar between different companies. The company will take a small percentage of the total cost of the invoice. The exact percentage will depend on the amount of  the bill, the credit worthiness of your customers, the terms of your invoices, and whether you are using any other services of the financing company. Make sure you have a full understanding of all the fees associated with using the service. The companies offering the lowest fees may have other hidden costs, as well as engage in practices that could put your business at serious risk.

Can I Use it for Any Customer?

Typically, you will only be able to receive financing for customers who have a solid history of timely payments—usually at least six months. You may be able to get financing for new customers; companies will evaluate these situations on a case-by-case basis.

What is the Difference between Recourse and Non-Recourse Factoring?

There are two different types of small business receivables financing—recourse and non-recourse .  With recourse financing, your company is ultimately responsible for payment of the invoice, no matter what the circumstances. In non-recourse factoring, you are relieved of liability in only one instance—if your customer cannot pay because of bankruptcy. In every other instance, you would still be responsible for paying, which is something that many business owners may not realize when entering into this type of agreement. The latter option typically comes with higher fees and more restrictive requirements.

What are the Benefits?

Invoice financing can offer many benefits. First and foremost, you get an immediate cash infusion—of course you are selling the invoice at a discount, but unlike a loan, you will not have to incur any additional debt. Unlike other types of financing, your creditworthiness is not a primary factor, rather, the credit history of your customers. The process is straightforward and you get the money very quickly. Having a steady cash flow offers many benefits for your business, such as being able to take advantage of volume discounts from vendors and early-payment incentives.

Kelli Cooper is a freelance writer who enjoys blogging about all things business.

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