An accounts receivable is a transaction between two businesses whereby one business sells to another on terms. Payment terms can vary depending on the party’s agreement, but net 30 is typical. An accounts receivable (invoice) is sent to the buyer once the seller delivers the product/service. This invoice becomes an asset of the sellers business and can be sold in exchange for cash. Accounts receivable financing allows the seller to get a high advance in the form of cash, immediately by selling the receivable to a third party. This is called Accounts Receivable financing.
There are many variables that a factoring company considers when approving a client for Accounts Receivable Financing. Below lists a handful of the most common variables that an Accounts Receivable Financing relationship is based on:
Creditworthiness of Buyers
The creditworthiness of the buyer is the most important variable to an Accounts Receivable Financier, since it is the buyer that pays back on the invoice once funded. The creditworthiness of the seller is considered, but typically to a lesser degree. The funder is likely to buy the accounts receivable if the buyer has financial strength and a history of paying on time.
Age of Accounts Receivable
Accounts Receivable Financiers are not collection agencies and therefore they are careful not to buy bad debt. The age of the invoice can say a lot about the customer’s ability to pay and/or the strength of the invoice. Accounts Receivable Financiers reserve the right to verify invoices by confirming with the buyer that the product/service was delivered AND accepted prior to funding. Also, some buyers can’t turn around payment to the funder if the invoice is too aged. This typically eliminates the possibility to fund said invoice.
Volume of Funding Need
Some Accounts Receivable Financiers will fund startup businesses but if the volume is too low then it does not create a mutually beneficial relationship. $20,000.00 per month consistently is on the lower end spectrum of what a funder requires.
Industry of Seller
There are many industries for which and Accounts Receivable Financier will fund. Service businesses such as staffing, security guard services, and consulting firms are highly desirable candidates because they bill hourly fees that are difficult to dispute. Manufacturers and distributors of all sorts are also desirable. Although there are funders that specifically cater to the construction and medical industries, it is much more difficult to obtain Accounts Receivable funding in those arenas because the billing typically has contingencies of payment and that creates risk in the mind of the funder.
Accounts Receivable Financing companies vary their programs and underwriting requirements based on their comfort and familiarity and/or areas of expertise. What one funder may have an appetite for, another does not. Best advice when applying for all funders: Give as much information upfront about your company and the owners of the company’s information because all funders have a much easier time approving a client when they know shortfalls upfront as opposed to uncovering issues and obstacles during the due diligence process.