What to Expect When It Comes to Receivables Financing

Owners of small business definitely have so many options when it comes to financing but Receivable Financing is one of the best options for everyone.

Now Question is - What are receivables financing?

The word “Receivables” defined as a payment due to a business. According to the term “Receivables Financing”, outstanding invoices are considered as assets and a business borrows against the total cost of its outstanding invoices for capital.

For instance, a group can borrow approx 60 – 80% advance on behalf of outstanding invoices from bankers. And then these bankers collect the outstanding payment and will payout the existing balance to the company after charging 3 to 5% of the total invoice amount.

Basically, there are two types of receivables financing:

INVOICE DISCOUNTING

An advance taken out against the invoice assets is called Invoice Discounting. This lets a group acquire funds against other funds that it is payable or outstanding.

FACTORING

In this case, a business sells its outstanding invoices to a third company and acquires funds. Actually, this is the sale of the assets, so at here the default risks move to the bankers or financers side

What does the factoring method look like?

  • Company sells a product to clients and generates an invoice.
  • In many cases, company cannot wait for the payment from clients and then they sell the invoice to banker or financer. 
  • The bankers or financers buys the invoice and pay a percentage of total amount to the group 
  • The bankers or financers buys the invoice and remits a percentage of its total to the business.
  • The bankers or financers collect complete payment from the company’s clients.
  • The bankers or financers return the due balance to the business and charging some percentage fee for assuming collections risk

When do companies opt for receivables financing?

Generally, accounts receivable financing seems sensible when a company facing gaps in structural cash flow. For example - because the company is necessary to pay for their goods (raw materials, stock) well in advance of when they will get paid for their products.

So now you understand that Receivable Financing is the best option for the smaller company who want to grow but struggling from the shortage of funds. And the best thing is that in receivable finance company sell the receivables rather than borrowing against them, so no credit history is mandatory and there are no EMI’s and payment to make.

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