How to Use Accounts Receivable Financing
Invoicing is a standard model for billing customers in most B2B industries, in addition to its popularity in public-facing industries that involve large projects like home repair and healthcare. It’s a model that provides flexibility for the customer, but that same flexibility can cause uncertainty for a company’s cash flow. The key to running a smooth operation while giving your customers a generous payment window to pay invoices can be as simple as finding the right way to access a cash advance regularly. Accounts receivable financing not only provides that path, it does so while using your invoices to fund it, so you don’t have to expand your company’s unsecured credit debt.
Finance Everything, Finance Often
The key to cash management with AR financing is figuring out how to minimize the cost to you. There are a few steps to that, but the process starts by scheduling regular financing dates throughout the year. The goal is to space them out enough to give customers who pay early a chance while also making sure your invoices are not very old when they’re financed. Generally, four to eight weeks apart is a good starting point. You can tweak to suit your company’s business cycle once you see how things start out. It’s also a good idea to finance everything at once. Companies that let you pick and choose among your invoices tend to charge a lot more for accounts receivable financing than the ones who want your whole set of receivables at once.
To further contain the costs, consider adjusting the way you quote invoices to reflect financing charges. It’s also a good idea to communicate with your financing company about which customers pay late enough to cause penalty fees or even default. Cutting customers who are repeat offenders can contain the cost of financing even more.
Factoring or Financing?
Accounts receivable financing looks a lot like factoring, but there’s a big difference. When you factor, you’re getting the invoices off your books, so the cash you get up front is all you’re getting. When you finance accounts for a cash advance against payment, though, you get any remaining sum left after the advance and fees are taken out. That makes it easier to earmark your operational money and your funds for profit dividends, reserve savings, or additional projects, and it does so while outsourcing all your invoice collection efforts beyond initial billing. There are a lot of other options out there for cash flow management, but none that offer the same opportunities to streamline your administrative tasks. Check out your options for AR financing today.
