How Accounts Receivable Financing works.
Accounts Receivable Financing is an asset-financing in which a company uses its receivables to borrow capital. In other words, the loan’s are based on outstanding invoices owed by customers. The company receives an amount reduced in value of the receivables pledged. The receivables' age primarily impacts the amount of funding the company gets. This type of financing helps companies free up capital that is stuck in unpaid debts. Accounts-receivable financing also transfers the default risk associated with the accounts receivables to the financing company.
BREAKING DOWN Accounts Receivable Financing
Accounts receivables financing companies typically advance companies 70% to 90% of the value of their outstanding invoices. The factoring company collects the debts and pays the original company any remaining amount beyond the financing amount minus a factoring fee.
How Factoring Companies Price Accounts Receivables
Factoring companies take several elements into account when determining how much to offer a company in exchange for its accounts receivables. In most cases, accounts receivables owed by large companies or corporations are more valuable than invoices owed by small companies or individuals. Similarly, new invoices are more valuable than old invoices. Generally, the easier the factoring company feels a bill is to collect, the more valuable it is, and the harder a bill is to collect, the less it is worth.
Helping Companies With Accounts-Receivable Financing
This type of asset-based financing allows companies to get instant access to working capital without jumping through the hoops or dealing with the long waits associated with getting a business loan. When a business leverages its accounts receivables to boost its cash flow, it also doesn't have to worry about repayment schedules. Instead of focusing on trying to collect bills, it can focus on other core aspects of its business.