If you’ve never looked into accounts receivable financing, the process can seem a little foreign. Invoice financing uses a completely different rubric for approvals and pricing than traditional installment loans with amortizing payments, but it’s actually very simple once you figure out the process. Instead of having to pull together all your financial statements and a credit report, your application includes disclosure of the invoices you’ll be financing, as well as the customer payment histories for the relevant accounts. Then, your customers’ payment histories and the likelihood of handling the bill promptly are used to determine the amount of any available accounts receivable cash advance, as well as the costs for penalties if the payment comes after the projected time frame.
Split Payments for Cash Management
When you when you begin with accounts receivable financing, you don’t sell them outright like you do with factoring. Instead, you get a cash advance based on their value, and that cash advance tends to be considerably less than the face value of the payment. After the payment comes in to pay back the advance and fees are deducted, any remaining payment is sent on to you. Most of the time, the projected fees are designed to leave a fair amount on the table as a second payment if the customers take care of their invoices on time. The later they are, the more likely it is that accounts receivable financing fees will eat up that remaining cash.
Once the accounts receivable financing agreement is signed and you have your working capital, the lender takes over collections on the outstanding invoices. This gives you the chance to outsource your accounts receivable by consistently financing invoices and communicating to your customers that this is a way of moving your collections out of house for efficiency and not a reflection of their account status. Once customers understand your process, it’s easier to have a smooth working relationship.
Consistent, Predictable Income
Many businesses operating on an invoice model wind up needing a little something extra to keep cash flow consistent, you’re not alone. When you have a regular financing model and a good relationship with a lender, it’s a lot easy to predict the cost of that capital, allowing you to factor it into your quotes. When that happens, you’re able to more consistently project your finances from month to month, giving you a lot more maneuverability when opportunities arise to expand your customer base or business capacity. If your small business needs any accounts receivable financing, Aspen Commercial Lending would be happy to assist you with any help you might need!