3 Primary Types of Accounts Receivable Financing
If you’re looking for a powerful tool that will help you manage your cash flow without adding a lot of debt to your company, accounts receivable financing has to be on your radar as an option. There are three main ways it’s handled, but this flexible financing technique has been popular for hundreds of years for a reason. If you’re looking at your options for factoring arrangements, it helps to know the differences between them so you can choose the most efficient option for your business.
The most basic type of financing for receivables is traditional factoring. This situation involves turning over your accounts receivable to a factor who then advances you anywhere between 70 and 90 percent of the funds, depending on how long customers are estimated to take repaying, how large the accounts are, and how many separate account payments there are to manage. The factor then collects payments, deducts the advance and fees, and passes on the remainder.
Selective accounts receivable financing takes things a step further, giving the borrower control over which accounts get financed. This makes it easy to finance customers who will keep you waiting on payment while collecting directly from the ones who pay promptly. Sometimes, you can even get a 100 percent advance on the receivables, provided the fees are paid out of pocket.
The last form of financing for your receivables is the one that usually has the highest fees, but it’s also an ongoing process that gives you access to credit as you need it, with constant adjustments too the amount available based on the state of your assets and payments. This format is used to create an on-balance-sheet credit solution you can count on whenever you need it, so you always have a credit draw when opportunity knocks.
Understanding when to use each of these options requires research and testing, so don’t be surprised if it takes one or two tries to get the right combination of lender and accounts receivable financing structure. Once you do find the right balance for your company, managing your ongoing cash flow needs will get a lot easier, because you will always have access to the cash you need for outgoing commitments, even when your customers are taking a little longer than usual sending their payments. As a piece of your credit portfolio, this financial instrument provides you with a guarantee you can tap into money you are owed when you need it.