Working capital is the money your business has to purchase supplies, pay the bills, and deal with unexpected expenses. Sometimes the need for this funding outpaces the collection, especially when you are taking on big projects or trying to reach growth goals. With the use of accounts receivable financing, you can get the working capital quickly while giving your clients plenty of time to pay for your services.
Understand What A/R Financing Is
A/R financing, sometimes called factoring, uses your invoices as collateral to secure an advance from a third party called a factor. You will choose which invoices to use based on criteria from the factor, such as a repayment term of between thirty and ninety days and how much capital you need. Be sure to choose accounts receivable which are in good standing and are for clients with a solid history of timely payments for the best result. With some factors, you will repay the cash advance plus a fee when your client pays you, and with others, the client will pay the factor, and you will receive any withheld funds above the advance and fees when the invoice is repaid.
Assess Your Short-Term Working Capital Needs
To get the most from your accounts receivable financing, you will want a significant enough advance to cover your capital needs until cash flow can stabilize, but not so much that you create another financing gap. Look at what your needs are now and what they are likely to be when your invoices are due. Spending your advance on getting supplies for the next big project, for example, will allow you to take on the client instead of turning him or her away and will secure another source of income.
Choose Your Invoices Carefully
While some companies work with a factor for all their invoice needs, others will take advantage of this financing option only once or twice a year. The biggest concern is carefully choosing which invoices to use as collateral because the factor will be looking at your client’s creditworthiness more than your own. Most requirements state that an invoice cannot be overdue and still has between thirty and ninety days until the due date.
Accounts receivable financing is a good option for companies dealing in invoices with thirty to ninety-day repayment terms, which need funding immediately to use for working capital. This type of funding is a cash advance with the invoice used as collateral and can help you take on more significant projects before receiving payment for work already done.
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