As a small business owner, sometimes you may see your cash flow hindered by slow-paying clients who have 30 to 60 days to honor their invoices. This creates difficulties when you have your own bills to pay. One solution to this dilemma is accounts receivable financing, also known as factoring, which offers you an advance on your unpaid invoices. Here are the steps to take to make this form of financing work.
Set Up Your Account
When you apply to a finance company to factor your invoices, it first performs due diligence to determine that your company is eligible for financing. This involves checking the creditworthiness of your clients if there are any liens on the receivables, your tax status, and your business background. Once this is done, you sign a contract and the account is set up.
Prepare Your Receivables
The next step in accounts receivables financing is the selection of the invoices to be factored. You submit these accounts receivables securely via fax, email or a special website together with a schedule of accounts.
Wait for Verification
The financing company then verifies the accounts receivables you have sent them. This is a quick process and facilitates funding.
Obtain Your Advance
Based upon the invoices you send, the industry you work in, and other criteria, the financing company sends your company an advance. On average this is about 80 percent of the value of the accounts receivables. You usually get this advance within a day or two of making your request via wire transfer or direct deposit.
Your Clients Pay Their Bills
Your clients make their payments based on the original schedule that you worked out with them. However, instead of sending the funds directly to you, they remit them to a special account or a lockbox. After the funds have come in, you receive the balance of your payments minus a factoring fee.
Repeat the Process
To keep your cash flow strong, you continue to utilize accounts receivable financing. As a result, you are easily able to handle urgent bills and other ongoing expenses.
For more advice on accounts receivable financing, contact Monstera Lending Group.