Small and medium business enterprises are mostly preoccupied with paying bills and keeping the firm afloat. As such, cash flow is a primary concern. However, money can be hard to come by should your clients request an extended payment term.
If you are having challenges collecting debts and worrying about delayed and late payments, read on to learn how accounts receivable loans work.
What is Accounts Receivable Financing?
Accounts receivable financing allows a firm to receive early settlements on their outstanding invoices. Accounts receivable loan financing is a kind of asset a business can use on its expected receivable as collateral for a loan in exchange for cash. An example of an expected receivable is a customer payment.
In simple terms, it’s a legal agreement where a business receives a credit against a payable amount to the firm in exchange for services or goods.
Business firms opt for accounts receivable financing to have cash in hand without waiting for the 30-60 days payment period to mature.
Accounts receivable financing helps business firms cease business opportunities and lower the risk of accruing bad debts. The funds channeled to the business, usually within 24 hours, are unbound and unrestricted, granting the business the flexibility that traditional banking firms do not provide.
Benefits of Accounting Receivable Accounts
- Complete maximization and management options allow you to request and have what you need, when you need it.
- The financing extended to you matches the true value of your business receivables.
- Your business account can receive 100% of the expected payment in advance.
- Your clients remain oblivious of your financial arrangements.
- The amount advanced to your business is determined by your creditworthiness and only partially on the business financial strength.
How do Accounting Receivable Accounts Work?
The process can be broken down into 6 steps;
- Account Setup
The financing institution will counter check some aspects before they can finance you, including:
- Your business receivables past report
- Your clients’ credit history and profile
- The business tax returns report
- Information about the business partners and owners
- Financial statements for the business and the proprietor
Once these issues are cleared, you are ready for setting up.
- Preparing your receivables
After the account is set up, it’s time to pick the clients and the receivables to fund your financial needs. The clients’ invoices may be submitted through a trusted website, fax or email. The financing institution may also require a schedule of accounts and other such documentation.
- Verification of goods and services
Immediately the customer receives goods and services, the financing organization verifies them. Verification entails ensuring that all the invoice totals are genuine and correct due within 30-60 days. Verification confirms to every party in the chain that there will not be any problems in the process. If there are any, they’re addressed in good time.
- Financing the receivables
Once verification of the goods and services is complete and satisfactory, the funds can be issued to the relevant firms. The financing organization calculates the advance and deposits the cash in the business greed bank account.
The advance refers to the invoice’s percentage the financing organization will refund. The amount it can fund varies from one bank to another. However the standard in the industry is 80%, though some institutions can fund up to 100%.
Ordinarily, the funds can be deposited within the day of verification. The money can be sent through direct deposits or by wire transfer.
- Settling the accounts
Your client should honour their invoices on the predetermined schedule. A client who pays electronically deposits the money into an agreed account. If mailed payments, the payment is done to a secure lockbox or process a cheque with your name.
When the funds are received by the relevant parties, the transaction is deemed settled.
- Repeating the process
Business firms can use accounts receivables financing as an alternative way of improving cash flow in the business. Such kind of funding can help your brand invest in new areas. It is also a reliable means for paying general operating business costs.
Closing Your Contract
When you do not need accounts receivables financing, you can end the contract by:
- Sort out a new lender who will use the turnkey funds to close the account
- Allow your accounts’ payout, which automatically closes the account immediately after the last invoice is paid.
So, whether you are experiencing payroll issues or the taxman is on your neck, account receivable financing can get you sorted. Every small or medium-sized business can leverage these benefits from almost all leading banking organizations.