What Are Accounts Receivable And How Can You Finance Them?

Posted by Team Finaxar on May 3, 2019 4:08:46 PM

What are accounts receivable and how to finance them

Working capital is necessary in times where you need to buy necessary expansion tools, inventory or to meet a payroll. Unfortunately, sometimes you run out of enough funds to meet these needs which are crucial for the growth of your business or company. Do you know there is a way to get capital trapped in your unpaid a/c receivable and take advantage of growth opportunities?

Before we jump into receivable financing, let’s get familiar with what are accounts receivables.

What Are Accounts Receivables?

Accounts receivables, commonly known as receivables, are the outstanding payments to a company from its customers in exchange for goods or services that had already been taken place/being provided. These are considered as a liquid asset of the company and noted under the current assets in the balance sheet.

Accounts receivables are also considered as a part of the company’s working capital. The accounts receivable turnover ratio of a company reflects its efficiency at the collection end and the quality of the customers.

For example, let’s say you own a business.

  • You have a potential customer with whom you have good trade relations.
  • Your customer receives products from your company on an agreement to pay within 60 days.
  • You raise invoices to this customer for the products purchased. These invoices are the accounts receivable to your company.
  • They act as a bill to your customer and an asset to your company.

If receivables are an asset of the company then how can we make use of them in getting an immediate fund? This is where receivable financing comes to help when you are in need of working capital or funds to grow your business.

What Is Receivable Financing?

Receivable financing is a method used where a company/business can receive funds in exchange for its outstanding accounts receivable. This is a type of financing which is carried out through a process called factoring, where a third party acts as a factor to whom you sell your invoices to receive funds. The term invoice factoring is also used more commonly in place of receivable financing.

The steps involved in receivable financing can be consolidated into the following:

Most of the factoring companies take application online and this process is followed by you providing the necessary documents. Your application will be reviewed and verified by the cash flow experts from the factoring company.

Once your application is approved from a factoring company/ financial institute, they credit you with an upfront payment up to 80-90 percent of your invoice amount. The factor will keep track of payments from your customers. You will be credited with the rest of the amount minus a factoring fee when your customer clears the invoices.

Receivable financing comes with added benefits of managing your customer payment details. A lasting relationship with a receivable financing company can benefit you with providing credit checks on new clients, financial reports and management of your customer payments. This, in turn, helps in organizing a repayment schedule from your customers.

So, does it mean you are completely out of the loop once you sell your receivables to a financing company? This is where you need to be aware of recourse factoring and non-recourse factoring.

Recourse Financing/Factoring

Recourse factoring is set up on an agreement with the company and the factoring company regarding the payment collection. This is also known as discount factoring. Recourse factoring calls for the company to buy back the invoices that are unpaid by the customers. Therefore, the company is still dependent on the quality of the customers they are involved in the business.

The majority of the factoring industry/ receivable financing industry is comprised of recourse factoring.

Non-recourse Factoring

Non-recourse factoring takes the risk of collecting the invoices from the customers completely from the company. But it comes with a price. The factoring charges for this type of factoring is higher than that of recourse factoring. This higher price paid is compensated by the risk factoring company takes on the collection end.

In conclusion,

Receivable financing can help you with providing funds for your company. This process avails quick funds with added benefits at the collection end of your accounts receivable. To choose the right plan that fits your needs and business, you must look for the terms and conditions involved while choosing the financing institute.

At Finaxar, you can receive quick funding through receivable financing for your company.