Accounts receivable financing is a type of asset-based lending allowing business owners to get secured capital through outstanding invoices. Rely on an accounts receivable financing company to advance you up to the full value of an outstanding invoice. Just keep in mind, they will charge a fee from the value every week until your customer pays the invoice in full.
Accounts Receivable Financing Can Be Secured in These Six Steps:
- Select the receivables you want to finance.
- Apply for funding with an asset-based lending company.
- The lender will advance you a part of the invoice’s face value, typically 80 to 90 percent but possibly up to 100 percent.
- You can then use the funds to pay for related business expenses. You will be charged a weekly fee until your customer pays up.
- Your customers will pay the lender directly for their invoice.
- The lender will minus their fees and will advance the remaining money to you.
Asset-based lending is not a business loan; however, the structure is basically similar. It’s like a small business loan, with the unpaid invoices being the collateral. The only difference is you don’t have to make payments to the company as long as your customer pays the invoice as intended. You can then use the money to improve your cash flow and make investments into your business. Compare this with a form of accounts receivable financing called recourse financing, whereby you are responsible for your customer paying the invoice in the end, not the asset-based lending company.
The goal of asset-based lending is to free up the cash in a small business that would otherwise be all tied up in unpaid invoices. This helpful tool assists small businesses in managing cash flow, while still paying employees and suppliers on time, and investing in your business more easily and rapidly.
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