First of all, let us define accounts receivable funding. This is the marketing of receivable invoices or outstanding receipts to a company that assumes the responsibility of the receivables at a lower price. They in turn will give some immediate working capital for your business. The amount of value that will be given to the account is inversely proportional to the maturity of a receivable. So, the newer the invoice is, the more it will pay. If, however, the obligation to pay is older than 90 days then the financer will not assume it.
Credit is provided to clients on net terms; then the financer must wait, as long as the terms last, before they are actually paid. The financer holds on to the receivables while waiting for the payment. Accounts receivable are pieces of paper that ensure payments, for products or services provided, that are delivered in the future.
As the financing company acquire the receivables of the client by giving them payment in advance. This payment is minus 10 to 30 percent of the entire value of their receivables. Upon fully receiving the payment for the invoices or receivables, the remainder of the balance is released to the client. A small percentage fee, usually 2% or more, is charged for this. Your business will be able to make big sales (account receivable) but still have a running capital to carry on with your own operations.
You can have a lot of benefits from this type of funding. One is it allows a company to free up the majority of the capital that has been tied up in inventory. Another is they wouldn't have to worry about collecting anymore, thus, their resources are spent on other activities that are more productive such as selling. This is a form of quick cash for small businesses that are in a tight pinch.
Some of the reasons why your business should do it is you can get a source for your working capital. Resources for payroll as well as taxes are readily available. You will have a funding program that is flexible as your sales go up.
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