Have you heard about accounts receivable financing, also called factoring and sometimes AR financing for short, and wondered whether it would be a useful tool for your business to have in its toolkit? This unique financing arrangement allows you to put your outstanding invoices to good use and receive a portion of your money early rather than waiting for payments to come through. If you’re considering this method to help get your company through slow business times or rough financial periods, here’s what you should know first.
Your Company Can Receive a Portion of Its Accounts Receivable Early
The most common reason many companies choose to use AR financing is because it means freeing up money that you can use now rather than waiting around for customer payments. Instead of waiting for invoices to be paid, for instance, your company can receive a portion of the accounts receivable early. This means accessing your funds as you need them and potentially smoothing over financial rough patches in the company’s budget. This also makes AR financing a helpful short-term solution for many types of businesses.
The Structure of Your Financing Arrangement May Depend on the Factoring Company You Work With
Although most AR financing arrangements have the same core tenets in common, the precise structure of your arrangement may likely depend on the factoring company that you’re working with. For example, some companies prefer to offer one-time unsecured loans, while others prefer asset sales. Some of the structure types you might encounter in AR financing include:
- A direct, one-time loan
- A sale of assets
- A recurring loan for large contracts
- Secured or unsecured loans
Most Factors Tend To Prefer Newer Invoices for Short-Term Arrangements
If you’re wondering whether you can factor older invoices or just newer ones in AR financing agreements, the answer is that while it’s technically possible to send in older invoices, most factoring companies prefer newer ones, especially for short-term financing arrangements. This is because the newer the invoice is, the more likely it is that your customer will pay it back on time.
Accounts receivable financing provides companies the opportunity to access their invoice money quickly and bridge the gap during tough financial periods. If you’re considering employing this interesting financing method, make sure to review these key facts first. Your company will be in a strong position to decide whether AR financing is the right tool to use now.