AR financing

As a small business, if you are every struggling to keep cash flow, it is important to know your options. One such option is that of accounts receivable financing or AR financing.

Accounts receivable financing is the selling of outstanding invoices or receivables at a discount to a finance or factoring company that assumes the risk on the receivables and provides quick cash to your business. That was a mouthful, let's see if we can help it make more sense. Basically, accounts receivables are given to the finance company, and the finance company pays you for them. The amount they pay depends on the account, the more current the invoice is, the more you are going to get paid for them. If you have invoices over 90 days, there is a good chance they are not going to get financed.

The finance company is basically buying the money owed to you at a discount. They may pay you 70% of what is owed. So, why would you want to do this? Why would a small business benefit from selling their accounts receivable? There are three main benefits in doing this, they are as follows:

1. You no longer have to deal with collections. If you are a small organization, using man power for collections can be costly. When a finance company buys your accounts receivable, and the right to collect them, they also buy the responsibility to collect on them.
2. It frees up working capital. Another huge reason to consider using AR financing if you are a small business is that it is going to help free up some working capital. It is all well and good if people owe you money, but if that money has not come in yet, and you do not have the cash flow and working capital to continue producing, pay employee, etc. that you may very well go out of business.
3. It is a quick financing option. Some forms of financing can take several months to secure and fund. This is a long time for a business that needs the capital fast. AR financing is quick financing. Once the accounts are approved for funding, you can have your money within a week. This means that you are not waiting for money, but getting it and getting on with your business.
When you use AR financing it is good to understand the standard costs. You would typically have a service fee and interest involved. They can very by financer, so be sure to understand those. In addition, there may be hidden charges like renewal fees, penalty fees,, insurance costs, refactoring charges if the account is over 90 days old, etc. Know what you are getting into so that you actually get the value you need from this form of financing.

AR financing is one of many financing options. Understanding the options available to small businesses is key to success. Take the time to look into and understand the various forms of business financing, and select the ones that are right for your business.