A type of asset-financing arrangement in which a company uses its receivables – which is money owed by customers – as collateral in a financing agreement. The company receives an amount that is equal to a reduced value of the receivables pledged. The age of the receivables have a large effect on the amount a company will receive. The older the receivables, the less the company can expect. Also referred to as “factoring”. This type of financing helps companies free up capital that is stuck in accounts receivables. Accounts receivable financing transfers the default risk associated with the accounts receivables to the financing company; this transfer of risk can help the company using the financing to shift focus from trying to collect receivables to current business activities.
TO QUALIFY:
- Business to Business Invoices
- Creditor underwrites the credit-worthiness of the businesses you invoice (must be in business 1+ years)
- Invoices net terms 15-90
- 10-20 customers that are businesses
- No liquidated damages, stage / progression / milestone billing, retainage, extended warranties, rights to offset
TERMS:
- $5,000-$20 million
- 80% of receivables advanced within 24 hrs
- 20% balance released once invoice is paid (minus lender fee)
- 1.25-4% Discount Fee
- No personal credit score requirements
Video
Example
Jody’s company has several contracts with various businesses. It would really help her business if they collected the funds on invoices immediately, instead of waiting until the companies pay their invoices. She received Accounts Receivable financing. This is where she receives 80% of the invoice value upfront and 20% (minus the lender fee) once paid. Getting instant access to funds has allowed her to hire new employees to grow the business.