What is Accounts Receivable Financing?

Accounts receivable funding is a great way to get extra money for any business. Most small business owners know the difficulties in using working capital to finance their businesses needs. In some cases, a small business may find themselves in a situation where they have cash flow shortages. This can occur because of lines of credit card issues or loans being insufficient for their needs. When businesses need cash fast, they turn to Orion Business Capital for a business factoring loan, also known as an accounts receivable loan.

Accounts Receivable

These loans are becoming more popular and are the business finance tool to use. So what is accounts receivable financing? It is actually one of the oldest forms of financing for a commercial unit. A company can sell a portion of their outstanding invoices to a factoring company, aka lender. They will assume the risk that these receivable will or will not pay. In return, they give the business owners cash they can use. The business gets immediate cash and the rights to those receivables are turned over to the lenders.

Think of it as selling a debt to a collection agency. The new company collects the debt and in exchange, the business gets the money for the debt up front. The customer still owes for the invoice, but they are now required to send payment to the factoring company. Now, the amount of the invoice may change based on its age. If the account is more than 90 days past due, they typically will not finance on stuff that old. However, they are free to add additional fees to any of these bills to attempt to collect the debt.

Accounts Receivable

Assume that a business had $100,000 in accounts receivables. Most factoring lenders will loan up to 80 percent of that amount or $80,000. Remember, they do not want bills usually that are more than 30 days past-due, as it presents a big risk. They also look at the quality of the receivables too. If there are big name clients who owe the business money, like Costco, they know that they will be able to get their money back. They will usually loan a higher percentage of receivables with more clout.

If the bills are mostly owed from smaller business, where collection activities may be hard, they may only loan up to 75 percent. The factor takes on the risk of collecting the debts. Once the receivable have all been collected, if there is any difference between the face amount of the invoices and the factor’s reserve amount, they will repay this. Factoring companies also charge a fee for their services. Accounts receivable loans are a great way to get money quickly.