If your business ever has too little working capital, you may need some financing that can help with your cash flow. One of the best options is invoice factoring, also called accounts receivable financing. In this arrangement, you can get funds for your outstanding invoices. So, if you are waiting to get paid by your customers, you can still invest in your growth.
How AR Financing Works
When you want to factor your invoices, you work with a financing company that will approve or deny your application based primarily on the credit profiles of your customers. Ultimately, they are the ones who will have to pay the balance, not you.
Then, you sell your invoices to the financing company at a discount. At that point, your role is done (other than selling future invoices). You can use the money for any purpose. The company collects the balance from your customers when it is due. In some cases, you may only receive part of the value of the invoice upfront, receiving the rest after collection.
Types of Accounts Receivable Financing
There are a few types of AR financing company. The first is a long-term partner that continues to buy your invoices. This can either be all of your invoices or a subset, depending on your agreement.
Another type of financing company will only buy one invoice at a time. This is called a spot factor. It can be helpful for businesses that need a short-term solution but don’t want to enter an extended relationship.
Finally, some companies will lend you money against your invoices. This is a slightly different type of financing (asset-based lending), but it is often grouped with accounts receivable financing.
Building Working Capital
The key benefit of this arrangement is that you will receive funding upfront for your invoices. You don’t have to worry about having enough working capital to manage your operational expenses. It can be a very powerful tool for ensuring your business’s lasting success.
How To Get Started
Getting started with accounts receivable financing can be surprisingly easy. You just need to have customers that you invoice. Typically, you will want to apply before you have outstanding balances. Then, just submit your invoices through the financing company’s process.
Discover more about invoice factoring and how it could help your business. If you ever find your finances strained while you wait to get paid, this is something that you should seriously consider.