What is Accounts Receivable (“A/R”) Financing?
Accounts Receivable Financing (“AR Financing”) is when a company sells its A/R (unpaid invoices) to a lender. It is the sale of the unpaid invoice to a third party.
By selling your unpaid invoices to a creditor, you will be able to significantly reduce your cash conversion cycle and generate immediate liquidity for your operation.
Other than paying Line of Credit balances first, do whatever you need to with the money – fund growth, buy inventory, pay invoices, pay debts, pay taxes, pay bills, get supplier discounts or pay yourself. Although it varies slightly by industry and volume, for most companies A/R Financing advances are up to 90% of the invoice.
Why use A/R Financing:
Companies commonly choose A/R Financing if they want to receive cash quickly rather than waiting for the duration of the credit terms or slow paying customers; so you can maintain cash flow when you are waiting to get paid 30 to 180 days. A/R Financing is commonly used across multiple industries – transportation, manufacturing, government contracting, textiles, oilfield services, health care, staffing and more.
A/R Financing can also free up money that is caught up in unpaid debts, sparing your business the often-uncomfortable ordeal of collecting overdue bills.
Benefits of Using A/R Financing:
- Up to 90% of eligible invoices advanced.
- There is no limit to the amount of financing you can pursue (minimum is $50,000 first time).
- Based on sales revenue not your company’s overall financials.
- A/R Financing is based on the quality of your customers’ credit not yours.
- Save time and effort that would otherwise be spent on collecting money from customers.
- Online reporting available.
How Much Does A/R Financing Cost?
Although it varies slightly by industry and volume, for most companies will pay in the 2.5-5% range. The factors that determine rate are:
- The industry that the company is in.
- The volume of receivables to be factored.
- The quality and creditworthiness of the company’s customers – the easier to collect the more value they have.
- Days outstanding in receivables (average days outstanding).
What documentation is required to begin the A/R Financing process?
- A completed application.
- An accounts receivable aging report.
- Financial Statements or 2 months bank statements.
- A list of customers and the invoices to be factored.
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