What Is Accounts Receivable Financing?

If you run a business that takes on custom short or long-term projects, you’ll be familiar with the process of creating and sending an invoice for the work completed. Typically, these invoices have a payment due date of anywhere from 15-90 days.

Since payment is delayed by 1-3 months (in most cases), many businesses of this nature run into the issue of being short on cash at hand because money is still waiting to be collected. For small businesses, this can be a pretty big hurdle early on.

When new projects come in, they require capital (labor, equipment, inventory) to complete. Without money on hand to invest in those resources, small businesses may have to pass on a project or extend completion dates. The speed and quality of a project usually determine if a long-term relationship can be created. 

In order to overcome this hurdle of having money tied up in accounts receivables, there are accounts receivable financing options available.

What Is Accounts Receivable Financing?

Accounts receivable (AR) financing is the process of securing early payment for an outstanding invoice that hasn’t been paid yet. There are lots of ways that this type of financing can be structure, but typically it revolves around the basis of either a loan or an asset sale.

Accounts receivables are outstanding invoices that have yet to be paid, and as such, they are reported as assets on a company’s balance sheet. This means that they qualify as a sort of liquid asset. There are lots of companies out there that will take on an outstanding invoice and issue out an immediate payment. These companies are typically referred to as factoring companies.

One way that accounts receivable financing is done is through an asset sale. Basically, a company sells the outstanding invoice to a factoring company. This financier may pay up to 90% of the amount of the invoice (depending on the terms), and then is solely responsible for collecting the total amount of the invoice. In the case of asset sales, most factoring companies will not be looking to buy past-due or defaulted, accounts receivables. They measure the quality of the invoice and create custom terms based on the age of the accounts receivable and the history of payment.

Accounts receivables financing can also be done in the form of a loan. Essentially, the invoices are not sold to the financier, but instead, they get an early payment from the service and then pay off the loan in full once the money is collected.

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