One popular way to finance business needs without taking out a loan is invoice factoring or accounts receivable financing. To succeed with this financing option, you will need first to understand the process, then research what makes a business a good candidate for this funding type, and finally, compare this option with others you may qualify for.
Understand the Process
Accounts receivable or invoice financing is using your customers’ unpaid but not overdue invoices as collateral for an advance. This is not a loan and relies more on the creditworthiness of your clients than your company’s. Once you have decided which ones to use, you will contact a lender who will review the accounts and, if approved, supply you with a percentage of the face value on those invoices. The lender will hold some of the value in reserve and deposit the rest minus any fees into your account when the invoices are paid. You will often not even have to repay the advance as the lender can take over the account collection process.
While there is no set industry standard on the qualifications for factoring, some general things lenders will look at include the repayment length of your invoices and whether the accounts are in good standing. Most lenders will finance invoices with thirty to ninety-day payments, and no lenders approve overdue accounts. In general, if you get paid through invoices and do not have a recurring problem with clients paying late on accounts, you will qualify for A/R financing.
Compare Financing Options
One of the most important things you can do when looking into any financing option for your company is to compare multiple options to see the best fit. One key factor to consider when determining financing options is the timeframe. Do you need money now, or can you wait for traditional loan approval? Invoice financing can be an excellent choice to meet your funding needs if you need money more quickly than a traditional bank loan and have little to no business credit history.
Accounts receivable or invoice factoring is a popular way to get paid now for work you have already done while still giving your clients thirty to ninety days to pay on their accounts. For the best success with this financing option, you will want to research various lenders and funding options, determine whether you qualify and understand how the process works.