Accounts Receivable Financing Ensures a Constant Cash Flow
A business is in constant need of some form of financing to ensure that its operations are never halted, because of a shortage of money. The finance is required for the buying of raw material, paying salaries, paying for utilities, administrative costs, and financial costs and to extend credit to their customers, in order to facilitate business.
One type of financing that is used by companies, uses their assets which have built up as a result of their supply of manufactured products or services, and which the customer has not yet paid for. This is called accounts receivable financing and is money owed to the business that functions as collateral. The lender will agree to provide an amount that is lesser than the total value of the goods billed to customers. This form of financing has been around for centuries and involves the pledging of invoices to a third party, or often their outright sale. This ensures that businesses receive cash immediately after they dispatch goods to customers, and this allows them to use it for continuing their activities, without having to wait for the proceeds of the sales.
In accounts receivable financing, a business provides the customer with their required product or service against properly documented invoices. Once the customer authenticates an invoice, the business sends this to the financing agency and in turn receives a percentage of the invoice value, normally ranging between eighty and ninety percent. In most cases, the customers will pay the invoice value directly to the financing agency, as and when it is due. Fees for this financing are decided in advance and these are deducted from the remainder value of the invoice and sent back to the business.
Businesses need to inform their customers about the financing arrangements, so that they make the payments to them, and it is necessary that they agree to such an arrangement. Financing companies have to depend on customers of the business for payments and will in most cases insist on verifying the credentials of such customers, and may even refuse financing if they are having any doubts about their credibility.
This form of financing allows businesses to use money from lenders to ensure their growth and continuing business. They however, need to be very careful to ensure the reliability of their customers, if this has to be a success. This arrangement works very well for older and well established customers who have a history of being scrupulous about making payments for goods received by them.