How Small Businesses Can Use Accounts Receivable Financing

Does your small business rely on customers to pay their invoices so that you can stay in the black? If so, you now that slow-paying clients could wreak havoc on your bottom line. Luckily, you have an option: accounts receivable financing. Financing your receivables allows you to receive a percentage of the value of your invoices right away, so you can continue to run a thriving business.

Six Easy Steps

The short version of financing your receivables is that it can be done in six easy steps. First, choose the invoices you’d like to finance, and then apply for funding with the company. You’ll receive a percentage (usually 80%) of its worth and use the money to pay your other business expenses. The lender charges a small fee (sometimes it is weekly, but sometimes it is simply a percentage) until the customer pays the invoice. Once paid, your lender will provide the remaining percentage to you, less any lending fees.

Recourse vs. Non-Recourse

When considering accounts receivable financing, you’re likely to hear the terms “recourse” and “non-recourse.” Most of this type of financing falls under the category of recourse. This means that you are responsible for the invoice. If your client fails to pay it in full, you’ll be responsible for covering any remainder (or the entire amount, if necessary). On rare occasions, you’ll find non-recourse options, which means you won’t be on the hook if your client doesn’t pay. In these situations, the lender will take on the responsibility of sending your client to collections, which will also save you time.

Eligibility Requirements

The eligibility requirements for financing receivables will vary slightly, depending on the lender you choose. However, you will need to fulfill a few basic requirements. First, your business must invoice customers (and many lenders will only finance you if your customers are other businesses). In addition, your business must have been in operation for at least six months and bring in a base annual business revenue of at least $50,000. Finally, the clients who have outstanding invoices must have good credit.

Accounts receivable financing is especially a good idea if you know that you have creditworthy clients, but your personal or business credit isn’t up to par enough to get a traditional business loan. Financing receivables is also an excellent choice if you need working capital quickly and do not have time to wait weeks or months to hear back from a lending bank. Remember to research your lender thoroughly before signing a binding contact, though.

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