Accounts receivable funding is a short-term type of financing where the business borrows funds based on its receivables. It is instrumental when there is a mismatch between cash inflow and outflow in a company. This article covers the essential aspects of accounts receivable funding that you should know.
There are three basic types of accounts receivable financing as discussed below;-
The company receives 80% of the receivables upfront, as the lender assumes ownership of the invoices and pursues their payment. Once the customers pay their dues, the factoring company remits the remaining 20% after deducting its factoring fee.
Selective Receivables Financing
As you might guess from the title, in selective receivable financing, a company can choose which receivables to submit to a lender for early payment. The primary difference with traditional factoring is that the business waits for partial remittance after the invoices are paid instead of receiving full payment upfront.
Generally, the financial rates are slower, as this financing option does not appear on its balance sheet. As a result, the agreement does not impact the company’s other debts or debt ratio.
In this type of accounts receivable financing, a company commits most of its receivable, with very little control over which invoices to submit to the lender. Though associated with higher fees, asset-based lending is still beneficial to the company choosing this financing route. Benefits include quicker and easier access, plus minimal compliance requirements.
- Receive capital tie to unpaid invoices. Instead of waiting for the payment date, you can receive working capital as soon as possible to keep your business afloat.
- Accounts receivable financing is more accessible than conventional credit lines. Minimum to no collateral is needed. In contrast, traditional institutions require an endless list of leverage
- Quick access to emergency cash. It only takes a few days to complete the application processing before you can receive the money directly into your account.
- Available to the business of all sizes
- Helps build a business creditworthiness
Factors Influencing Quality of Receivables
The quality of receivables is essential in accounts receivable financing. Here are a few factors that determine a receivable’s quality;-
A debtor with a low credit rating decreases the receivable quality, thus increasing the cost of borrowing, i.e., interest rates and reduction of lent amount.
The shorter the duration of receivable, the lower the cost of funding. Notably, receivables beyond 90 days are considered as default.
Excellent documentation boosts the quality of receivables as it provides contracts’ clarity and provides a basis for legal action in case of default.
Original Account Industry
The macro trends within the seller’s industry impact the debtor’s capability to repay their debts; hence is a crucial consideration as financial institutions wish to minimize their exposure to debt in particular sectors.
If you are financially stuck due to a delay in payments, seek accounts receivable financing for instant funding based on your unpaid invoices. Based on your preference and business type, you have three options, with multiple factors influencing the quality of your invoices.