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How to Get Accounts Receivable Financing

What it is

Accounts receivable financing is when a business sells outstanding invoices or receivables at a discount to a finance or factoring company. This finance or factoring company assumes the risk and provides cash to your business during a time of short cash flow. The amount of money paid to the business varies based upon the age of the invoices or receivables. A more current item will pay more, while a less current item will pay less. Any accounts receivable that are older than 90 days are usually not financed.

Accounts receivable financing comes with a lot of benefits, but a small business will pay for this service. Applicable discount fees and other charges can become quite costly over the course of a year, and are often more expensive than the interest on a more traditional bank credit or loan. Accounts receivable financing should only be used as a way to buy time until a credit line can be arranged. Rates will vary among companies. The two main benefits of accounts receivable financing are these: firstly, your accounts receivable management has been outsourced, freeing up resources and working capital for your business; secondly, this financing provides you with quick cash.

Who it's for

Accounts receivable financing is great for businesses that need immediate cash flow for survival. It is a good option for businesses that have exhausted all other means of financing. In order to make accounts receivable financing successful, a business should be prepared for an infusion of cash or expansion and should be aware of market trends and changes that could affect any new financing.

What you need to do to apply

To apply for accounts receivable financing, you will need some very basic information about your small business, including the yearly gross sales. Those considering a factoring or finance company should spend time investigating any available companies. The factoring business is not as regulated as the banking industry and it is necessary to inspect contracts and negotiate discount rates to avoid getting a bad deal.

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