Accounts Receivable & Invoice Financing

Financing Your Receivables Immediately Increase Your Business Cash Flow w/ YOU Getting Paid Faster 

In a "Perfect World", whenever your business provides any type of product or service you would be paid 100% of your money. In other words, you’d get ALL of your "asking price" right up-front, without any waiting . . .  however, the today's business world is far from perfect.

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Instead, in today's business world, you're generally required to extend credit to your quality customers in order to retain them as well as competing for new customers. 

Today, for most non-retail companies to compete (and thrive) they are compelled to offer credit to their customers.

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So, even though you may urgently need your money now, that's just not goanna happen. Instead, you'll be waiting 30, 60 or 90 days to be paid for your goods or services.  

It’s crazy. Waiting to get paid is bad enough but having to chase down your customers to get you money makes it lousy.  This is why most growing companies have a financial manager (CFO) overseeing their accounts receivable to maximize their cash flow and profitability.

Accounts receivable are the lifeblood of a business's cash flow. Sometimes referred to as A/R, "accounts receivable" is the accounting term used to refer to the money that the business should receive from its customers for the goods or services it provided. A company’s accounts receivable asset is an important part of calculating its profitability and provide the clearest indicator of the business's income. They are considered an asset, as they represent money coming into the company.

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So, to determine your company’s profitability, add up all your assets, including accounts receivable, and subtract your total accounts payable, or liabilities, which are what you owe to suppliers and vendors. If the number is positive, the company is profitable. If it's negative, then decisions must be made regarding how to increase the assets or reduce the liabilities.

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When you sell goods or services to a customer and allow them to pay you at a later date, this is known as selling on credit, and creates a “liability” for the customer to pay your business.  Conversely, this creates an “asset” for your company, which is called accounts receivable. This is considered a short-term asset, since you are normally paid in less than one year.

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An account receivable is normally documented through an invoice, which you are responsible for issuing to the customer through a billing procedure. The invoice describes the goods or services you have sold to the customer, the amount it owes you (including sales taxes and freight charges), and when it is supposed to pay you.

Why Track Your Accounts Receivable?

If you do not keep track of accounts receivable, you’re likely creating financial problems (losses) for your company and hold it back from its true growth potential. You risk a lot of problems …  

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For example, 1) you may forget to bill certain customers, 2) you may not know if you've been paid by certain customers or certain jobs, 3) you may end up providing your product for free, and 4) you may negatively impact your ability to be profitable.

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The reality is that the longer it takes to send the invoice, the less likely it will be that your payment will be sent by the customer. Keeping track of accounts receivable is also a great way to have documentation supporting proof of income at tax time.

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Many small and mid-sized companies don’t manage their A/R very productively. And therefore, perhaps without even knowing it, are losing money and robing themselves from their profits.

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This is why A/R is best managed on a consistent and routine basis. It’s easy in retail because each transaction is paid for immediately, so there’s no amount due. However, with many other industries, customers apply for a credit line, and orders are placed against the credit line.

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To get paid, your customer is provided an invoice and payment terms with the shipped product, payable later. Therefore, regardless of your system, ensuring prompt payment is crucial.

A/R Financing Provides Three (3) Important Business Management Solutions

1. Gets you paid now, so you can use your money now

2. Provides a professional A/R back-office accounting staff (keeping you organized)

3. Transfers the default risk associated with the A/R to the financing company

Accounts Receivable Financing is a borrowing arrangement in which a company uses its outstanding accounts receivables or outstanding invoices (also known as a company’s AR) owed by their customers as collateral to receive financing.

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In this agreement, an accounts receivables financing company, also sometimes called a factoring company, gives the original company an amount equal to a reduced value of the unpaid invoices or receivables.

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This type of financing helps companies free up their capital… their funds that are stuck… stuck in their unpaid receivables. 

Accounts Receivables financing companies typically advance companies 70 to 85% of the value of their outstanding invoices, based upon the quality of the customer, with the balance kept in a reserve account to hedge against any returns.

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Then, the factoring company collects the debts and pays the original company the remainder of the amount collected minus a financing or factoring fee. It’s a real win-win scenario.