Nearly every business that manages payment in the traditional client-invoice style has accounts receivable. These do not pose a problem if they total to a small sum. But if they are a significant amount of money they can pose serious cash flow issues to your business. Thankfully, one thing you can do to mitigate this issue is to finance your accounts receivable. Here is everything you need to know about accounts receivable financing.

What Is It?

When a client does not pay an invoice within the set parameter of time, the money that should have been paid gets added to an account receivable. This is a total of the amount of money that is owed to a business by its clients. When this sum gets very high it presents numerous problems for the business. Financing your accounts receivable provides relief from many of these problems. ARF is a type of loan that pertains to your accounts receivable. Essentially, when you finance your accounts receivable, you are given access to the funds that should have been paid to you, and in return, you have to pay interest on that amount of money.

What Types of ARF Exist?

There are three main types of financing for accounts receivable. The first is asset-based lending. This is when you take out a loan but offer up an asset that you own as collateral. This allows for much lower interest rates, as the lender can seize the asset if you fail to make payments. The second type of ARF is traditional factoring. Factoring works by shifting the collection responsibility to a 3rd party company. That company will give you 80% of the original sum, and keep 20% of recoverable funds as a fee. This is a great option for those who do not want to deal with collecting, as it can be a difficult process. The third type of ARF is called selective receivables finance. This works by selecting specific outstanding payments to finance, and can often offer lower interest rates as lenders can pick and choose clients that have better credit scores.

That is everything you need to know about accounts receivable financing. ARF is a fantastic option for small business owners who are stuck with large sums of money in their accounts receivable, and it allows businesses to grow and develop by giving them access to funds they should have already had in the first place.