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Accounts Receivables Financing
Using your business's accounts receivable can be key in helping you secure the necessary loans for your business. Reach out to learn more today.
Increase Borrowing Capacity with Accounts Receivable Financing from Ai Capital Funding
Acquiring the capital you need to run a business successfully can be challenging. It's even tougher when you believe in your business model, but don't necessarily have the credit to obtain an unsecured loan. It's at these times that other options such as accounts receivables financing present an additional option for you to consider.
At
Ai Capital Funding we help businesses compete by providing innovative solutions to the search for capital. One example of this is accounts receivable financing, which allows a company to leverage its relationship with vendors to create a lending opportunity. If your company sells services or products to a company on terms of 90-day net or more, financing receivables could be a boon for you.
The landscape of receivables finance encompasses three primary types, each serving distinct financial needs for businesses.
Asset-Based Lending (ABL):
Also referred to as a business line of credit or traditional commercial lending, asset-based lending is an on-balance sheet approach often accompanied by significant fees. In this method, companies commit the majority of their receivables to the program, limiting their flexibility in selecting which receivables are committed. This commitment results in a structured financial arrangement with predetermined terms.
Traditional Factoring:
Diverging from reverse factoring, traditional factoring involves a business selling its accounts receivable to a funder. However, the initial payment received is typically less than the full amount of the receivable. For instance, a company might obtain early payment for 80 percent of the invoice amount after deducting processing fees. Unlike asset-based lending, traditional factoring provides companies with more flexibility in choosing which receivables to trade. Nonetheless, funder fees can be relatively high, and credit lines may be more constrained. The factored receivables are recorded on the company's balance sheet as outstanding debt, akin to the ABL approach.
Selective Receivables Finance:
Offering a more flexible and tailored approach, selective accounts receivables finance empowers companies to cherry-pick the receivables they wish to advance for early payment. This method allows companies to secure advanced payment for the full amount of each chosen receivable. Notably, financing rates tend to be lower compared to other alternatives. Importantly, the unique structure of selective receivables finance often means that it does not count as traditional debt, keeping it off the company's balance sheet. Consequently, this approach has minimal impact on debt ratios or other outstanding lines of credit, making it an appealing option for businesses seeking financial flexibility.
How does accounts receivable financing work?
Accounts receivable financing is a form of loan wherein a company's outstanding invoices, commonly known as accounts receivable, serve as collateral. In this financial arrangement, the lender provides an advance, constituting a percentage of the invoice value, either as a term loan or a line of credit.
Let's delve into the step-by-step process of how accounts receivable financing operates:
Application for Accounts Receivable Financing:
The initial step involves selecting specific invoices to submit as collateral to the lender. It is advisable to choose receivables from reliable customers with a proven track record of timely invoice payments. In cases involving new customers or uncertainties about existing customers' reliability, it is prudent to wait until a more established relationship is formed.
Funding Process:
Accounts receivable financing is typically structured as a line of credit, allowing you to borrow only the necessary amount when required. The advance rate represents the portion of the invoice value that the lender disburses upfront. This rate typically falls within the range of 70% to 80% of the total invoice amount. For example, if an invoice amounts to $1,000 with an 80% advance rate, the lender disburses $800 immediately.
Invoice Payment by Customer:
With accounts receivable financing, your customer directly settles the invoice they received, allowing you to retain ownership of the invoice. This stands in contrast to accounts receivable factoring, where a factoring company pays you for the invoice and subsequently collects payments directly from your customer.
Repayment to the Financing Company:
Once your customer fulfills the invoice payment, you are obligated to repay the loan or line of credit along with any applicable fees and/or interest. In situations where the customer pays the lender directly, the lender then remits the remaining payment to you, deducting the owed fees or interest. This repayment process ensures the completion of the accounts receivable financing arrangement.
Accounts Receivables Has A Number of Advantages.
Using its accounts receivable invoices allows a company to base its credit application on the credit of its customer instead of its own, turning financing receivables into an asset. This funding source includes several benefits.
- Quick cash
- No fixed payments
- No recourse
- Free credit insurance for qualifying accounts
- Not at the mercy of a loan board decision
- Funding increases as sales increase
- Financing regardless of business
There are no stipulations on the money you receive from financing receivables. You can use your funds for payroll, new equipment, marketing, or other business needs.
Contact
Ai Capital Funding today and learn more about our products. Set up an appointment for a free financial consultation or click on the Apply for Loan button below.
