When clients are not making timely payments for the services your business has provided, it can easily throw off your finances. The longer you wait to receive payments, the less capital you have to cover important operational expenses. Thankfully, immediate solutions are available. A service like accounts receivable financing offers you the chance to sell your unpaid invoices to a lender and receive an advance on the funds you’re owed. Review these details to gain insight into how the service works and how you can use factoring options to your advantage.
What Does Factoring Entail?
Factoring is an asset-based financing service where a lender purchases qualifying invoices from you and provides you with an advance. Typically, the lender will review your accounts receivables and deliver a percentage of the total value upfront. The lender then assumes the responsibility of acquiring the debt from your client. After you pay a fee and the lender has collected the full amount owed, you receive the difference. Though straightforward, there are several finer points to remain mindful of before assuming this is the correct fit for your needs.
What Constitutes a Qualifying Invoice?
Not all invoices will qualify for accounts receivable financing services. Lenders prefer to purchase options that come from trustworthy and reliable clients. Invoices that come from government or military establishments are usually the most likely to qualify. The customer’s personal history with your business will also influence matters. If your client has made consistent payments on previous invoices, then the lender is more likely to accept the bill. What’s more, a lender may be more interested in purchasing invoices when there are several attached to a single entity. Review the specific criteria of the lender to understand eligibility requirements.
What AR Financing Options Exist?
Invoice factoring can often be broken into two separate services. The first is full-service factoring. In this arrangement, the lender purchases the invoices and assumes complete responsibility for collecting the debt from the client. However, you will pay a higher fee for this service. The other option is recourse factoring, wherein you are obligated to purchase the invoices back from the lender in the event that the client never makes a payment. Typically, recourse options are better in arrangements where your client is highly likely to make a payment.
Should a client take too long to make a payment on services you’ve provided, it can easily cause major financial problems for your business. To avoid this and retain access to working capital, consider your options with accounts receivable financing solutions.