The 6 Steps in Accounts Receivable Financing
As a business grows its commercial sales, it also grows its accounts receivable. Many times, a company must wait 30 to 60 days to be paid for the outstanding balances in its accounts receivable. Depending on timing of expenses, 30 to 60 days may be too long to wait, and the company will require funds sooner to meet its own operating expenses. Accounts receivable financing is a viable solution to provide needed cash for operations rather than wait for receivables payments.
The process for accounts receivable financing is divided into six steps.
Step 1: Setting up the account and due diligence
Due diligence is a series of checks to verify that your company is eligible for financing. The following items are commonly checked or verified by the accounts receivable financing company:
1. Creditworthy commercial accounts
2. Account receivables aging
3. Receivables must be unencumbered by liens
4. Corporate taxes must be up-to-date
5. Background check of business owners
Larger funding amounts will also require a review of financial statements. Upon completion of the above due diligence, the account is set up and the accounts receivable financing process moves to the next step.
Step 2: Preparing your accounts receivable
Now it’s time to choose which clients and invoices you wish to fund. Your client list and invoices are sent to the accounts receivable financing company along with a document called a schedule of accounts. This document acts as your request for funding through the accounts receivable financing company.
Step #3: Verifying your accounts receivable
The accounts receivable financing company will contact the customers to verify the invoice amounts, be sure there are no credits due that offset those amounts, and verify that the amounts are due within 30 to 60 days.
Step #4: Financing your submitted receivables batch
After the accounts receivable financing company has verified your invoices, the process moves towards funding the advance for those invoices. The advance amount will vary by industry and may be affected by other criteria. On average, the advance amount for your financed invoices will be about 80% of the invoice amount.
Funds can be sent to you via ACH bank transfer or by wire transfer. Wire transfer is the faster method, providing funds availability within a day. However, both methods will deliver funds within about 2 days.
Step #5: Customer payment and settlement
Your customers continue to make payments when due, but the payments are sent to a lockbox. The accounts receivable financing company processes the payments. Electronic payments are directed to a special account to be processed.
Once the invoices are paid, the accounts receivable financing company will rebate the remaining 20% of the invoice value, less a finance fee.
Step #6: Repeat as needed
Accounts receivable financing provides faster access to funds needed for operations. Once the account is set up, there is no need to repeat the first two steps. Future transactions will follow the remaining four steps. Many companies that utilize accounts receivable financing find value in the process and continue to access the benefits.
