How Does Accounts Receivable Financing Work?

How Does Accounts Receivable Financing Work?


Companies often work with commercial clients who pay their invoices in 30 to 60 days. Giving clients net-30 terms is common for many companies. Unfortunately, some companies don’t have the cash reserves to wait that long for payment. They need to get paid sooner so that they can pay for their own expenses.

Accounts receivable financing helps companies by allowing them to finance their slow-paying invoices. This article shows you how the receivables financing process works so you can decide if it is a good fit for your business.

Step 1: Due diligence and account setup

The first step of the receivables financing process is performing the due diligence so the account can be set up. The due diligence allows the finance company to determine if your company can be financed. The finance company usually checks:

  1. The credit quality of your clients

  2. Your receivables aging report

  3. If any liens encumber your receivables

  4. If your corporate taxes are up to date

  5. The relevant background of the business owners

Step #2: Getting your receivables ready

Once the account is ready, the next step is to select the clients and receivables that will be funded. Once customers have been selected, their invoices can be submitted. Invoices are usually submitted along with a schedule of accounts document. The schedule of accounts serves as the formal request for funding.

Step #3: Accounts receivable verification

Once the receivables are received, they are verified with the customer. The objective of the verification is to ensure that the invoice amounts are right, that there are no offsets, and that they are due in 30 to 60 days. This step helps prevents problems in the funding process.

Step #4: Financing the batch of receivables

After verification, the invoices are ready for funding. The advance is the percentage of the invoice that is funded. It varies by industry and other criteria.

Step #5: Payments and settlement

Your customers pay invoices on their regular schedule. Mailed payments are sent to a lockbox. The lockbox is a facility that allows the factoring company to process check payments in your name. If your customer pays electronically, the funds are deposited to a special account.

Step #6: Ongoing process

Most companies finance their receivables as part of an ongoing process to improve cash flow. It is as simple as repeating steps two through four. Factoring accounts receivable provides companies with funds to pay for expenses and to run the business.

Receivable Loans Can Correct Your Cash Flow Problems

Receivable Loans Can Correct Your Cash Flow Problems