6 Key Points to Understanding Accounts Receivable Financing

Any business in need of a quick influx of cash may look to accounts receivable financing for assistance. By taking advantage of this unconventional lending, you are able to get the cash you need for business expenses or expansion without taking on additional monthly debt. If you wonder what AR financing is all about, here are six key things you need to understand.


AR financing works by using outstanding invoices as a source of potential cash. When companies slow pay on their bills, you may notice the cash flow slowly starts to fade. By converting your invoices into cash, you enter a partnership with a factoring company. Here’s how it works.


  1. Establish an account and meet approval.The factoring company doesn’t look at your personal or business credit for an AR financing relationship. They are more concerned with the creditworthiness of your customers, your aging AR report, if your corporate taxes are up to date, if there are any outstanding liens on your receivable, and the overall business background of the business owners. If everything is good to go, a contract is signed and you can begin factoring.


  1. Prepare your receivables.After your contract has been signed, you need to get your receivables ready. Select your customers and their invoices, and send them to your factor either by email, fax, or a secure website. You will also need to submit a schedule of accounts document, which acts as the official request for funds.



  1. Wait for verification.After the company receives your invoices, they will verify them with your customer. This ensures the amount on the invoices are correct, and their payment schedule is between 30-60 days. The prevents hiccups in the accounts receivable financing process.


  1. Invoices are funded.Your factoring company will calculate your cash advance on a rate between 70% to 90% and have the funds deposited into your bank. This is usually happens within a day of submitting your request.



  1. Settling the payment.Your customer pays the invoice as normally scheduled, and the factoring company will process the payment in your name. Once the transaction is complete, the invoices are marked as paid and your company is refunded the remaining percentage on the invoice, minus a fee.


  1. Repeat steps two through four.Factoring can occur as often as needed in order to improve cash flow.



Use accounts receivable financing to fund your business expenses when in a cash crunch.

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