Business owners that are in need of money can get account receivable financing which allows them to sell some of the outstanding invoices to the factoring company to get early payment in exchange for a fee. Business accounts receivables financing is not considered as a loan because it does not require you to make any repayment. The advantage of business account receivable funding is that it offers you fast cash.
Small businesses that need instant cash will find this financing option suitable for them. For example, you can get an account receivable financing to get funding for small renovations or restocking the inventory. With instant access to cash, you will be able to buy the equipment that you need to improve production and sales. It frees up resources in your business. You will save time from having to go to each customer to collect the payment so that you can focus more time on growing your business.
Account receivable financing does not require you to put in any collateral to get funding. Many business loans require you to use your business asset as collateral which can be risky when you fail to keep up with the payment. You don’t have to give up ownership of your business when you choose this type of financing. It is a much better financing option compared to depending on outside investors which will require you to give up a portion of the ownership to your business. By selling the outstanding invoices, the factoring company will now bear the risk of the receivable.
The customer that owes the invoice will have to pay the factoring company instead of paying you. The amount that you can get from selling the outstanding invoice depends on how long it has remained unpaid. The more current the outstanding invoice is, the higher its value will be. Usually, the factoring company does not accept account receivables that are aged more than 90 days old because of the high risk level to them. For invoices that are aged more than 90 days old, there is a high chance that the factoring company will not get paid by the customer.
Besides the age of the receivables, there are also other factors that determine the likelihood that your customers will pay the invoice. The percentage of the advance funds that you will receive from selling the receivables can depend on the credit score of your customers. If the customers that owe the invoice are large corporations with excellent credit score, you are likely to get approved with a higher percentage of advance funds. The percentage of the advance funds that you receive will be lower if the majority of the customers that owe the invoice are small businesses with average credit score.