Accounts Receivable Financing

How to Use Accounts Receivable Financing to Grow Your Business

How to Choose an Accountable Finance Company for Your Business in Milledgeville

Accounts receivable financing is a type of financing that allows businesses to borrow against their future sales. It is used to finance the purchase of inventory, equipment, and other assets necessary for the business’s operation.

When a company has an outstanding balance on its accounts receivable, it is in debt. Accounts receivable financing is often used to reduce the amount of debt a company has.

If you’re looking for accounts receivable financing, there are several types of accounts receivable financing out there. The two main types are asset based accounts receivable financing and cash flow based accounts receivable financing.

Here’s A Quick Overview Of Benefits Of Accounts Receivable Financing

AR Financing
AR Financing

Asset Based Accounts Receivable Financing

Asset-based accounts receivable lending involves borrowing money from investors by selling securities or using another form of collateral such as real estate, machinery, vehicles, furniture, office supplies, etc. This type of accounts receivable loan can also involve purchasing existing loans within your portfolio so that they become part of your own account base.

Since this type of accounts receivable funding requires additional capital upfront, companies usually need at least six months’ worth of financial statements before applying. Companies with less than $1 million in annual revenue may find it difficult to get approved for this kind of accounts receivable financing.

However, if you have a good credit history, experience in managing similar transactions, and solid documentation, you could qualify for this type of accounts receivables financing.

Advantages Of Accounts Receivable Financing
Advantages Of Accounts Receivable Financing

Cash Flow Based Accounts Receivable Funding

Cash flow based accounts receivable funding provides access to funds when customers pay invoices. These accounts receivable loans do not require any security because payments come directly through bank transfers or electronic fund transfer systems.

However, to receive these kinds of accounts receivable financing, you must provide detailed information about past performance, current operations, projected growth rates, and more. You’ll typically need between three and 12 months’ worth of financial reports to show how well you’ve performed over time.

Accounts Receivable Loans
Accounts Receivable Loans

Advantages Of Accounts Receivable Financing

Business owners who want to use accounts receivable financing should consider all available options first. They include traditional banks, alternative lenders like microlenders, private equity firms, venture capitalists, angel investors, crowdfunding platforms, peer-to-peer lending sites, and even social media influencers.

Once you decide which option best fits your needs, make sure you understand what terms apply to your particular situation. For example, some forms of accounts receivable financing will only work if you already have a relationship with the lender.

Business growth depends on many factors, including having enough working capital. If you’re struggling to keep up with growing demand, contact us today! We offer flexible payment plans and competitive interest rates. Our experienced team helps businesses grow their business while keeping them focused on running their business. Contact us now to learn more about our services.

Accounts Receivable Lending
Accounts Receivable Lending

AR Financing – Calculating Annual Business Revenue

Annual business revenue is calculated by multiplying gross sales times 365 days divided by 52 weeks. The result represents the average daily rate multiplied by the number of days in an entire year. A company’s net profit margin is determined by dividing its operating income by its revenues. Operating expenses are subtracted from operating income to arrive at net income.

Business expenses are broken down into two categories: fixed costs and variable costs. Fixed costs remain constant regardless of whether the firm has one employee or 1,000 employees; they represent the cost of doing business. Variable costs increase proportionally with the size of the organization. As the number of employees increases, so does the amount spent on wages and benefits.

Months of business operating cash flow refers to the amount of money that comes into the business during each month plus the amount spent out minus depreciation charges. This figure is used to measure whether the business has sufficient liquidity to meet short-term obligations such as payroll, rent, utilities, etc., without borrowing against assets.

Accounts Receivable Funding
Accounts Receivable Funding

Accounts Receivable Funding Aligned with Business Bookkeeping

Business bookkeeping systems help companies manage finances efficiently. Bookkeepers track key data points related to accounting processes, such as inventory levels, customer orders, employee wages, vendor bills, and other important metrics. Businesses often hire accountants to create customized bookshelf software tailored specifically to their industry.

Some small businesses may choose to handle basic bookkeeping tasks themselves using spreadsheets or simple online tools.

Business credit bureaus collect information about businesses for various reasons. These organizations compile this information so they can sell it to others interested in buying businesses.

Credit reporting agencies also report information about individuals to potential creditors when someone applies for loans or lines of credit. In addition, these agencies maintain databases containing personal information about people.

Accounts Receivable Companies
Accounts Receivable Companies

Receivable Funding After a Business Credit Check

A business credit check is performed to determine how well a prospective borrower would do financially should they borrow funds from a bank or another financial institution. It is not uncommon for banks to perform background checks before approving loan applications.

However, most states prohibit employers from performing criminal history records searches on job applicants.

Your business credit rating will affect your ability to obtain new loans, insurance policies, and even employment opportunities. Your score is based on several different types of information: current debt, past-due accounts; total available credit; inquiries made within the last six months; length of time since previous inquiry; type of creditor making the request, and recent payments.

Receivable Funding
Receivable Funding

Invoice Factoring

Invoice factoring is an alternative method by which businesses receive immediate payment for goods sold. Factoring involves selling invoices to investors who provide the working capital needed by the company.

The invoice seller receives upfront payment for the sale while waiting for customers to pay them later. Invoice discounting works similarly, but sellers are paid after collecting all outstanding debts owed to them instead of receiving upfront payment. Both methods allow businesses to access additional funding more quickly than traditional sources like bank lending.

Financial Receivables
Financial Receivables

Reverse Factoring

Reverse factoring is similar to invoice factoring except that the buyer provides cash flow to the seller. For example, if you have $100,000 worth of sales coming in over 30 days, you could factor those invoices with a reverse-factor provider.

They’ll advance your money today at no cost to you, then wait until your clients pay off their balances. Once they do, you repay the lender plus interest. You keep any remaining balance.

Receivable Factoring

Receivable factoring is yet another option for companies looking to raise extra cash. This process allows buyers to purchase invoices at discounted rates.

Companies typically offer discounts ranging between 10% and 50%. Receivable factoring requires less paperwork than invoice factoring because there isn’t as much risk involved. If a customer doesn’t pay his bill, the supplier has recourse against him. But if the client defaults on an invoice, the supplier still gets paid.

The factoring company collects the invoice and sends it to its own collection department. When the account becomes delinquent, the collector contacts the debtor directly.

Some collectors may threaten legal action if necessary. Others use-friendly negotiation tactics first. Either way, once the customer pays what she owes, the amount goes back into the supply chain.

Factors usually require collateral equal to 20%-30% of the value of the invoice being purchased.  A factoring fee ranges from 1% – 5%, depending on how large or small the order is.

Most factors also charge monthly fees ranging from 2% – 15% of the face value of each unpaid invoice. These charges are waived if certain conditions are met.

In addition to providing instant cash advances, some factoring providers will buy your invoices outright. In this case, you don’t get paid immediately, but rather when the invoice is collected through other channels.

Addressing Cash Flow Issues with Accounts Receivable Lending

Cash flow issues often arise when business owners find themselves unable to meet payroll due to slow collections. Many times, these problems stem from inaccurate financial reporting.

By using factoring, businesses gain control over their finances since they can see exactly where every dollar’s going. And unlike banks, factoring firms won’t ask for personal guarantees. So not only does the company save time, but so too does the owner.

Cash flow loans can provide additional cash flow during tight periods by allowing companies to borrow funds against future accounts receivables.

The benefit is simple: lenders make immediate payments based on current revenues instead of waiting months or even years before receiving payment. Factoring companies will collect upfront and hold the loan proceeds until the debt is fully repaid.

Best Accounts Receivable Financing Companies
Best Accounts Receivable Financing Companies

Choosing the Right Receivables Lending Company

When choosing a factoring service, look for one that offers competitive pricing and flexible terms. It should also include easy online applications and quick approval processes.  Cash flow hiccups happen; choose a provider with a good reputation who understands your industry and is committed to keeping up with changes in accounting standards.

A short-term cash flow gap occurs when sales fall short of projections. This could mean that revenue streams aren’t coming in fast enough to keep pace with expenses. For example, let’s say that you sell widgets at $50 per unit. You estimate that you’ll need to sell 30 units per month to break even. Your actual results might show that you sold 25 units last month. That means that you’ve got five fewer units than expected!

Cash flow constraints occur when there isn’t sufficient money available to pay bills as they come due. If you have an outstanding bill that needs to be paid within two weeks, it creates a cash flow constraint because you don’t have access to enough cash to cover both the initial expense plus interest costs associated with borrowing the money.

The solution? Ask yourself whether you really need the product or service right now. Can you wait until next quarter to purchase more inventory?  Cash flow gains may be possible if you decide to cut back on marketing efforts or reduce prices. But remember that customers expect prompt delivery of goods and services. Delaying shipments causes lost goodwill and damaged relationships.

If you do decide to delay purchases, try to set aside extra cash reserves. A small amount saved here and there adds up quickly. Also, consider selling off excess inventory. Some vendors allow buyers to pick up unsold items at cost. Other options include consignment stores, liquidation shops, and auctions.

Asset Based Loans for Businesses of All Sizes

Asset financing allows business owners to use assets like equipment, vehicles, and real estate as collateral for bank loans. In exchange for providing security, asset financiers receive regular monthly repayments from borrowers.

These are known as “asset-based” loans because the borrower uses their existing assets as collateral. Asset finance has become increasingly popular among entrepreneurs looking to expand operations.

Liquid assets can help businesses weather temporary financial storms. Liquid assets include accounts receivables, inventories, and prepaid expenses. Businesses often turn to banks for lines of credit so they can borrow against these types of assets.

Banks typically require high levels of personal guarantees from company executives. However, some smaller banks offer less expensive forms of asset financing called secured lending. Secured lending requires only minimal amounts of personal guarantee.

An asset sale structuring strategy is one way to raise capital without using your own funds. An asset sale involves transferring ownership of certain assets to another party, who then assumes responsibility for paying all future operating expenses related to those assets. The asset sales arrangement is when the new owner will also assume liability for any past debts owed by the seller.

In addition to raising capital through debt and equity offerings, many companies issue preferred stock instead of common shares. Preferred stocks carry higher dividends but lower voting rights compared to common shares.

Benefits Of Accounts Receivable Financing
Benefits Of Accounts Receivable Financing

Accounts Receivables Finance Loan

The receivables finance process begins once an invoice becomes due. Once invoices reach their payment terms, the customer must pay them in full before receiving further products or services.

Accounts receivable financing provides immediate liquidity to meet this demand. This type of loan is usually offered by commercial lenders such as banks, leasing companies, and factoring firms. Factoring is a specialized form of accounts receivable financing where a third-party provider buys outstanding invoices from clients.

Collateral finance companies provide short-term funding based on the value of a specific property that serves as collateral. Collateral includes everything from cars to office buildings to boats. Companies with good track records may be able to secure better rates than others. For example, if a car dealership secures a $100,000 auto loan, it would have access to about $200 per day in available money.

The finance provider makes payments directly to the supplier rather than to the business itself. A typical contract between a lender and a client specifies how much cash flow the client receives each month while repaying the principal amount plus interest over time. If you’re considering borrowing money, ask yourself: How long do I need the money? What’s my repayment schedule? Will I get paid back every month? Can I afford not to make payments?

Collection Processes

The responsibility for the collection process falls into two categories: legal action and nonlegal action. Legal action refers to court proceedings initiated by creditors to collect unpaid bills. Nonlegal actions include sending letters reminding customers of overdue balances, calling customers’ homes or offices, and contacting local law enforcement agencies.

A bill collector collects delinquent accounts by following up on phone calls made by employees at the debtor’s place of employment. These collectors are known as field representatives because they visit businesses throughout the country.

The collection period varies depending on whether the account was opened online or via telephone. Online accounts typically receive follow-up contact within three days after being placed on hold. Telephone accounts can take longer to resolve.

If your company has been collecting its own accounts receivable, consider outsourcing these collections to a professional agency. Outsourcing allows you to focus more attention on growing your business. You’ll save both time and money by delegating tasks like billing, credit approval, data entry, and other administrative functions.

The collection risk also decreases when an outside firm handles the work instead of internal staff members who might feel pressured to close out old accounts quickly.

In addition to saving time and resources, outsourcing helps ensure compliance with federal regulations governing debt collection practices. In particular, the Fair Debt Collection Practices Act requires all parties involved in the collection process to treat consumers fairly and honestly. To avoid violating FDCPA requirements, many organizations hire independent contractors to handle their debts.

Conclusion

A cash flow shortage is one of the most common problems facing small business owners today. It affects almost everyone, from entrepreneurs just starting to established companies that want to grow but find themselves struggling to keep pace with demand.

A cash flow bind often results from poor planning, lack of capital investment, slow sales growth, high fixed costs, bad timing, too little inventory, inadequate marketing efforts, insufficient customer service, missed opportunities, etc.

The types of accounts receivable financing solutions discussed here will help you manage your cash flow. Hence, you have enough working capital to meet current obligations while still having funds available to invest in new products, services, equipment, advertising campaigns, training programs, employee bonuses, etc.

To learn how to improve your cash flow along with getting access to funding sources with attractive rates, please give us a call at (888) 653-0124We offer flexible terms and competitive rates. We are dedicated to helping our clients succeed!  Our goal is to provide quality products at affordable prices. 

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FAQs for Accounts Receivable Financing

What Is The Difference Between Factoring And Accounts Receivable Financing?

A business accounts receivable provider offers two main forms of financing: Factoring and Accounts Receivable Financing. Both provide short-term loans for customers’ invoices; however, there are some key differences between them.

Factoring involves providing immediate liquidity for your clients’ outstanding invoice balances. This means that once we advance your client’s payment, they receive it immediately. If the amount owed exceeds what you’ve advanced, the balance becomes due and payable upon receipt of the next periodic statement.

Is Factoring Receivables A Good Idea?

Business accounts receivable records show that factoring has been used successfully for decades. The advantage of factoring over traditional bank lending is that businesses can get instant cash without waiting months or years for repayment.

However, factoring does come with certain risks. For example, if your company goes bankrupt before paying back its loan, the factor may not be able to collect any remaining amounts owed. Also, factors typically charge higher interest than banks do.

Your business type might also qualify as an ineligible borrower under state laws. Finally, because factoring deals only with past transactions, it cannot predict future performance.

Accounts receivable financing provides more flexibility than factoring. With this form of financing, you receive upfront payments based on projected collections rather than actual collections. You’ll pay less upfront, but you won’t need to wait until bills become overdue to make additional advances.

What Is The Cost Of Factoring Receivables? 

The business borrowing option usually comes with lower fees than other options such as credit cards, lines of credit, and personal loans. However, most factoring providers require their borrowers to sign contracts that limit liability should they go out of business.

In addition, many factors require collateral when extending these types of loans.

Business capital needs vary from industry to industry. Some industries rely heavily on sales revenue, whereas others depend primarily on customer service. It’s important to understand your own financial situation before deciding whether factoring is right for your business.

Cambridge-Lee Holdings Consolidated Results of Operations for Q2 2021″

Source: (galvnews.com)

It’s Easy to Borrow Money If You Have Money”

Source: (bloomberg.com)
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