Accounts Receivable Financing:

What is Accounts Receivable Financing?

Also known as accounts receivable funding, this is a type of funding wherein capital can be obtained by leveraging a company's outstanding invoices. An accounts receivable loan is a short term financing option where the tenure is generally between 30 – 90 days. 

Since they are considered liquid assets, the value of an unpaid invoice translates to its theoretical value to investors. Nevertheless, many companies perceive them to be a liability as collections can be made only in the future. However, modern-day financing flips the script by allowing businesses to utilise unpaid invoices as an asset that can truly help in business growth and expansion.

What are the 3 Primary Types of Accounts Receivables Financing?

The three primary types of accounts receivables financing are:-

• Traditional Factoring – This is a type of accounts receivable loan wherein a business turns over unpaid invoices to a factoring company. The business gets 70 – 90% of the accounts receivable, which the factoring company itself collects from the vendor. The factoring company pays the business after deducting a certain fee. 
• Selective Receivables Financing – In this type of accounts receivable financing, the funding company allows a business to choose which invoice to present for funding. The rate of interest is generally lower than alternative options.
• Asset-based Lending – This is a process where accounts receivable funding companies provide a line of credit to businesses against equipment, property, or inventory. This funding is relatively easy as it involves assets as collateral.

How Does It Work?

It is generally a 6 step process, as demonstrated below.

• Account setup and due diligence – Due diligence allows accounts receivable funding companies to determine if a business is eligible for making use of the service. A company buying accounts receivable typically has a stringent approval process. They scrutinise a business on the credit quality of clients, ageing reports of the receivables, corporate payment taxes, etc.
• Getting invoices ready – Once the account is set up, a business has to select the vendor and receivables that will be financed. The invoice is then submitted through a secure website along with the required documentation.
• Verification – The account receivable funding company verifies the invoice, ascertaining the accuracy of the details, and that they are in fact due within tenure specified.
• Buying accounts receivable – The funding company then purchases part of the account receivable depending. The time to disburse the amount varies from companies. KerdX disburses the amount within 72 hours of approval.
• Settlement – Within 30 – 90 days of disbursal, the vendor will make payments directly to the financing company. They will then pay the business after deducting the stipulated fees.
• On-going cycle – For most businesses, this is an on-going cycle as a regular capital injection is required for the smooth operation of a business.