Using Accounts Receivable Financing for the First Time

Using Accounts Receivable Financing for the First Time

Financing your receivables can be a great way to set guaranteed pay dates so you can manage your cash flow more effectively, but you need a clear strategy to make the most of this unique financial tool. Since accounts receivable financing is a cash advance against money owed and not an invoice sale like a factoring agreement would be, it may or may not include recourse to hold you accountable if the client fails to pay. There are financing companies that approach things each way. So how does AR financing work?

Application Materials & Process

Your credit score is not the issue if you’re taking an advance on customer payments, so the application process is a little different from what you might be used to. You’ll need to submit your invoices as well as financial statements that show customer payment histories. This allows the financing company to get a look at how long each regular client typically takes to pay when your bill. You will also need to supply other basic identifying information about your business like your tax ID and proof of business license. If you are tentatively approved, you may be contacted for additional verification of resources like the correct operating insurance.

Customer Notification

Once you have been approved and signed a financing agreement, the next step is to communicate the change in payment instructions to customers. Using accounts receivable financing means assigning the financing company as the recipient of the payment. They collect, deduct the advance and fees, then send you the remainder once all the costs have been covered. If your customers pay in full and on time, it’s usually a considerable second payment. As a result, many companies use this process to structure cash flow and cash reserve savings, making the budgeted expenses run on the initial advance so the remainder can be saved or taken as profit.

Receipt of Cash & Future Financing

You should get the cash advance within a couple of days after approval, with the timing mostly depending on your bank’s deposit processing time. If your customers pay smoothly and pay directly to the lender, it’s a simple matter to refinance more outstanding invoices when you need to structure a cash influx. If you do have customers who fail to pay, the accounts receivable financing company might mandate those invoices be left out of future financing agreements. If customers make a habit of nonpayment, they almost certainly will require it. Otherwise, you can finance invoices as often as needed when you have them. Contact Charis Commercial Capital today to learn how accounts receivable financing can boost your cash flow and enable growth.


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