Accounts receivable financing is a short-term funding method available to businesses for their receivables. It is an excellent alternative when a timing conflict occurs between the cash inflows and outflows of the business. Regardless of the various forms that account receivable financing can be structured, its main types are:
Invoice factoring allows businesses to get paid on their outstanding invoices without the typical 30-60-day wait time. It is an arrangement whereby a company receives financing based on a portion of the money it is owed by its customers (usually 70-90% of the number of outstanding invoices). Essentially, the factoring company is financing those slow-paying invoices.
For more details about invoice factoring, consider our blog ‘’Factoring vs. Bank Loans’’
Accounts Receivable Loans
Accounts receivable loans are short-term funding alternatives that a borrower can use as collateral to withdraw a bank loan. If the bank loan is approved, the bank would lend a fraction to the borrower, depending on the quality of receivables of the assets provided as collateral. In this case, the borrower still owns the asset and is, therefore, still responsible for it.
This type of security is the type of funding offered to large organizations. An asset-backed security (ABS) is a bond channel that pays coupon-based payments to investors by capturing cash from an underlying cluster of owned assets.
One of the most commonly used asset-backed securities is a mortgage-backed security, where the mortgage is the primary asset. Large corporations can ensure the safety of their receivables by holding receivables passing through collectible payments and investors. On the other hand, borrowing corporations can receive their money through the same channel. In this type of Account Receivable financing, creditworthiness directly depends on the quality of the bond.
Is Accounts Receivable Financing Right for Your Business?
There are several reasons to consider accounts receivable financing as a funding alternative for businesses. However, it is still important to evaluate its compatibility with the needs of a business. Accounts receivable financing is essentially short-term funding and therefore is sometimes not the best option for certain companies.
In general terms, a business might be a good candidate for accounts receivable loans when invoice business customers are facing short-term funding issues, such as:
- Short-term cash flow shortage
- Cannot meet seasonal demands
- Must pay employees, suppliers, or regular bills while awaiting invoice payments
- Need to hire additional employees to grow the business or fill a seasonal demand
If your company is facing some of the problems mentioned above and you would like to learn more details about A/R Financing, contact our team of experts at[email protected].