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Accounts receivable refers to all invoices that have been sent to a business' customers, but have not yet been paid. The term is often used interchangeably with invoices. In short, an invoice is a bill; accounts receivable is a collection of bills.
Accounts receivable financing, also referred to as factoring, is the purchase of accounts receivables from a business at a discount. The business generates invoices when it bills its business or government customers for goods or services provided. Accounts receivable funding allows businesses to collect money they are owed immediately by accepting a discounted (reduced) amount of the invoice from a third party funding source, or factor. Overall, businesses that utilize this financing as a business strategy agree that it is the easiest, quickest and least expensive way for a business to raise working capital and improve cash flow.
When a business sells to other businesses or a government entity, it is called commercial transaction. In commercial transactions, goods are typically sold on credit. The buyer does not have to pay for the product immediately. In fact, the buyer may have 30, 60 or even 90 days to pay. This is called buying on terms.
Producers extend payment terms for a number of reasons, including the following:
- Competitive Edge: Offering credit makes a producer more competitive in the marketplace. Businesses can buy products from many different vendors. If the only difference between vendors is their payment terms, buyers often will choose the vendor that offers the longest period of time to pay for the goods. Businesses generally want to hold on to their cash as long as possible.
- Verify Goods: Offering terms gives the buyer time to verify shipment of the goods, check the quality of the goods and cut a check to the seller. This process can take quite a while. In larger companies, each step is completed by a different department. Each department needs time to perform its functions and communicate with other departments.
When a commercial customer buys on terms, it does not get a receipt for the sale. Usually, it receives an invoice.
Accounts Receivable Funding Is Not Money Lending
Accounts receivable funding is not a lending service. It is a discounted purchase.
Funding sources are not subject to the same regulations that banks are because accounts receivable financing is an outright purchase, not a loan.
Banks base their financing on the strength of the business applying for the loan. The funding source bases the purchase of invoices on the credit of the business's customers, not on the credit of the business.
Benefits Of Accounts Receivable Funding
- Unlimited capital - As your sales increase, so does your working capital-- allowing you to meet increasing production demands. Accounts receivable funding is the only financing model that provides capital based on your sales activity.
- Bad debt protection - Many funding sources offer non-recourse funding, assuming the risk of delinquent debt and allowing you to eliminate this expense from your business income statement.
- Invoicing simplified - Funding sources take responsibility for the processing of receivables, including computerized invoice posting, check deposits, and payment reports all available to you in "real time".
- Greater purchasing power - With working capital to purchase raw materials, you can take advantage of better terms and volume discounts from your suppliers significantly offsetting the cost of accounts receivable funding.
- Preserving profits - Since businesses that utilize accounts receivable funding receive their cash immediately, there is no further need to offer your customers terms unless you choose to. Take your money off the table and further offset the cost of accounts receivable funding.
- Maintain control and equity - As opposed to compromising your business goals by accepting venture capital financing or a new partner, maintain 100% control & equity as well as resolve your cash flow concerns.
- Flexibility and choice - Based on your specific cash flow needs, you have the flexibility and choice to determine how much or how little of your receivables you want to fund from month-to-month.
If your business sells products or services to other businesses or to the government on terms, a line of credit that can range anywhere from 30 to 60 days or more, you are a strong candidate for accounts receivable financing.
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