What is accounts receivable financing?
What is accounts receivable financing? It is a financial solution where businesses leverage their outstanding invoices to obtain immediate capital.
Instead of waiting for customers to pay their invoices, companies can access a portion of the receivable value upfront, helping them manage cash flow and meet pressing financial demands.
This method is particularly useful for businesses aiming to maintain operations or invest in growth without taking on traditional debt.
How does accounts receivable financing work?
To know what is accounts receivable financing? it is important to know how it works
Accounts receivable financing involves selling unpaid invoices to a financing company.
Typically, businesses receive an advance of 70% to 90% of the invoice value, with the remainder (minus fees) paid after the customer settles the invoice.
Unlike traditional loans, this method doesn’t rely on estimated earnings but is secured by existing receivables, making it a relatively safe option.
For example, if a company has $100,000 in outstanding invoices, a finance provider might advance $80,000 immediately.
Once the client pays the invoice, the business receives the remaining $20,000, minus applicable fees.
Interested in accounts receivable financing? Click here to discover more about our accounts receivable financing services.
Example of Accounts Receivable Financing
To better understand ‘What is accounts receivable financing?’, let’s look at an example.
Imagine a tech company, Tech Solutions, that just landed a big contract with a major corporation to provide custom software.
The agreement stipulates that the corporation will pay the $100,000 invoice in 90 days. Meanwhile, Tech Solutions needs immediate cash to cover operational costs like salaries, equipment purchases, and marketing.
Instead of waiting three months to get paid, Tech Solutions turns to accounts receivable financing.
They work with a factoring company that advances them 85% of the invoice value, or $85,000.
The factor holds the remaining 15% as collateral until the client pays in full. Once the corporation pays the invoice, the factor transfers the held 15% minus a small service fee.
Relationship to Factoring
This example showcases how accounts receivable financing, through factoring, helps businesses turn their outstanding invoices into immediate cash.
Rather than worrying about long payment terms, Tech Solutions can maintain healthy cash flow and focus on its core business.
To learn more about ‘What is accounts receivable financing?‘ and how it can benefit your business, click here and contact us now.”
Advantages of Accounts Receivable Financing
- Improved Cash Flow: By converting receivables into cash, businesses can address immediate financial needs such as payroll, inventory purchases, or operational expenses.
- Revenue Stability: Especially useful for B2B companies, where sales cycles often involve large but infrequent payments, ensuring consistent cash flow.
- Reduced Risk: Unlike traditional loans, financing is based on actual invoices, so there’s less reliance on projections.
- Operational Flexibility: Companies can focus on growth without being bogged down by delayed customer payments.
Types of Accounts Receivable Financing
There are three primary types of receivables finance, each tailored to different business needs:
- Asset-Based Lending (ABL): This is a traditional financing method where companies secure a credit line based on their receivables.
While it offers significant funding, it often comes with higher fees and requires committing the majority of receivables.
- Traditional Factoring: Businesses sell their invoices to a finance provider for an upfront payment, usually around 80% of the invoice value.
While this offers flexibility in choosing invoices, fees can be higher, and the process may be recorded as debt on the balance sheet.
At Expocredit, we are experts in factoring. Click here to learn more about our factoring.
- Selective Receivables Finance: Companies choose specific invoices for financing and can secure full advance payment.
This option is typically more affordable and may not appear as debt, depending on the structure.
Factoring and Its relationship with accounts receivable financing
Factoring is a form of accounts receivable financing where businesses sell their invoices to a third party (the factor) at a discount.
This enables companies to access immediate funds while outsourcing the collection process.
Unlike other financing methods, factoring doesn’t add debt to the balance sheet, making it an attractive option for businesses seeking short-term liquidity.
Additionally, with non-recourse factoring, the finance company assumes the risk of non-payment, offering added security.
Why Choose Expocredit for Accounts Receivable Financing?
Expocredit offers customized non-recourse financing solutions tailored to your specific needs, ensuring fast and efficient service.
We’ve built strong partnerships with leading banks like Bank Mercantil, Bank United, and Bank Sabadell, allowing us to offer competitive rates and unparalleled expertise.
Ready to learn more about ‘What is accounts receivable financing?’ and discover its benefits?
At Expocredit, we understand the unique challenges businesses face when managing cash flow.
That’s why we offer flexible, innovative accounts receivable financing solutions tailored to your specific needs.
Whether you want to stabilize operations or invest in expansion, our team of experts is here to provide the funding and support you need to achieve your goals.
Let us handle your receivables so you can focus on what truly matters—growing your business.