Financing receivables can be your most potent cash flow management tool if you understand how it works and how to take advantage of its features to streamline the administration of your accounts. In fact, some businesses make it a matter of course for accounts that are not paid within the agreed-upon grace period, as a way of outsourcing receivables while getting access to the working capital they need. When you work the features of accounts receivable financing to their best advantage that way, you can save on labor and administrative costs that come from repeatedly tasking your finance team with collections. For some borrowers, that savings alone can be worth the cost of financing and then some.
So How Does It Work?
When you finance your receivables, you still hold the invoice debt. Your customers need to direct their payments to your financing company, which means you need to notify them of the arrangement. It’s important to communicate clearly with them, so they know you’re not selling the invoice for collections, you’re just tapping into a tool to help streamline your billing. The lender accepts payment and deducts the cost of the advance they gave you and their fees, based on the contract you signed and the timeliness of the payment. All the leftover money is then sent to you, from your lender.
With a little planning, it’s easy to work the cost of financing into your invoice quotes for customers you’re likely to need to finance, it just takes some practice. At this point, you’re probably wondering if accounts receivable financing requires you to finance all your invoices at once. That varies from lender to lender, but it is generally less expensive to finance them all in a group than to pick and choose, because the perceived risk to the lender is lower.
What if My Credit Score Isn’t Great?
Businesses with little credit history or troubled credit tend to like financing their receivables because the advance is based on your customers’ financial health and payment histories, not yours. After all, it’s technically the customer who will be paying back your advance and not you, right?
What if My Customer Doesn’t Pay?
The answer to this question depends a lot on the contract for financing. Many lenders have fee structures that take into account the risk of extreme late payment without recourse to the borrower, but it often means losing the back end payment when the customer does finally send money. Sometimes there are recourse agreements that hold you accountable after a period of time if the debt goes unpaid, but there are also lenders who offer no-recourse advances and make it their business to take on the risk of collecting. A lot depends on who you work with when you need accounts receivable financing.