How Accounts Receivable Works and Accounts Receivable Uses
Accounts receivable financing also known as invoice factoring is beneficial to business owners that want to turn their invoices into working capital. Instead of waiting for months for a customer to pay his or her invoices, accounts receivable factoring allows business owners to get an advance. Then, you can use the cash for other business needs.
How Factoring Works
Factoring is a form of financing that you have access to after your business provides goods or services to a client. After the service, your business follows these steps:
- Invoice the customer and send a copy of the invoice to a factoring company
- The company funds your business with an advance that is between 70 and 90 percent of the invoice
- Your business gets the remaining invoice amount sans a small feel once the customer pay
When you receive accounts receivables factoring, it is a relatively simply process. Then, you have the money to operate your business.
Uses for Factoring
If your business handles a lot of invoices, then accounts receivables financing might be for you. Likewise, if you need funds quickly, this is a great solution.
Some of the common uses of factoring include:
- Inventory maintenance for materials
- Maintenance for short-term every day expenses
- Encouragement of business growth
- Provides cash liquidity
Factoring is a form of financing that you are able to use for any expense related to your business. Use it for payroll, equipment financing, or other expenses you need on the day to day.
Benefits of Factoring
There are many benefits to factoring. Here are some of the benefits that you can experience:
- Helps you build your credit profile
- Helps your business survive a downturn
- Allows you to pursue other opportunities
It’s no surprise that quick access to cash is helpful to your business. It allows you to pay for any expenses, without having to wait for clients to pay.
Cost of Financing Receivables
The cost of financing your receivables depends on three different factors:
- Additional fees
- Service length
- Fee rates
Factoring and individual fees do not tend to cost that much. The fee rates are between 0.5 percent and 5%. If you have a low fee rate, you may end up with additional fees.
Accounts receivables financing is a great solution that allows you to take your invoices and create working capital. With this form of financing, you don’t have to worry about waiting weeks or months for your customers to pay invoices. Instead, you get an advance on the invoices to use on business expenses.