Accounts receivable financing involves a business selling its uncollected invoices (or receivables) to a finance or factoring company. Many businesses have turned to this type of financing and found success with it.

How It Works

Accounts receivable financing comes in two major forms: asset sales and loans. Most fall under the category of asset sales. In this setup, the lender buys the accounts receivable at a slight discount and then takes on the responsibility of collecting. Usually, factoring companies seek out short-term receivables. They are usually not interested in defaulted receivables and instead look for newer invoices.

Loans are the less common setup. When this setup is used, the accounts receivable often act as collateral to secure the loan. The business still needs to collect on the accounts receivable. However, as pointed out on Investopedia, there is one potential plus for businesses: They retain ownership of the accounts receivable. As with other types of loans, the business pays back the lump sum borrowed over time. This usually involves interest and other fees.

The Benefits

Accounts receivable financing offers several benefits to borrowers. For one, either there will be no collateral involved or, in the case of loan setups, the accounts receivable can act as collateral. This removes one hurdle—coming up with assets for collateral—that often blocks companies from obtaining funds.

Another advantage is that the business ownership structure does not change. In other words, there is no need to involve third parties like investors to raise funds.

A third bonus is that when it takes the form of an asset sale, accounts receivable financing can free up considerable time for the business: They no longer have to worry about tracking down clients and customers to pay the outstanding invoices. In many cases, this combination of fast cash and convenience is hard to beat.

To learn more about different financing options and other business topics, be sure to read the rest of LMC Alternative Business Capital’s blog posts.