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How to Apply for Accounts Receivable Funding

Last week, we posted a blog about Accounts Receivable funding and how it can help your business grow. This week, learn more about the ins and outs of applying for Accounts Receivable financing, including how it stacks up to other types of loans.

Accounts Receivable Funding vs. Conventional Business Financing

Small businesses can benefit from conventional business financing programs, such as business lines of credit. You’re granted a credit line to act as a nest egg in case of emergencies or for growth purposes. If you don’t use it, you don’t pay for it.
There are two major disadvantages to obtaining conventional financing from banks and lenders:

  1. Meeting Qualifications – Businesses must meet very strict guidelines to qualify for conventional financing. A company must have a long history of positive cash flow. Often, collateral of some sort is required.
  1. No Flexibility – If your business is growing fast, you may need a limit increase quickly. This takes time because you’re required to repeat the underwriting process all over again. That means you don’t always get the capital you need as soon as you need it.

Selling your account receivables is quicker than regular financing. Plus, the line of credit is based on your sales. As your sales grow, so does your credit line. This is an effective short term business financing solution.

How Does Accounts Receivable Financing Work?

Many small businesses just don’t have the cash reserve needed to wait 30-90 days for invoice payments from commercial clients. They have expenses they need to pay to keep the company running smoothly.
Accounts receivable financing gives you cash now, so you don’t have to wait on slow-paying clients. Typically, this is how the process works:

Step 1: Apply for Accounts Receivable Funding

You must apply for funding through a factoring lender. They check various areas of the company’s finances and business operations to determine whether you qualify or not, such as:

  • Your client’s creditworthiness
  • Age of the receivables
  • Liens against receivables
  • Corporate tax payments
  • Relevant info related to owner’s background

Step 2: Prepare the Receivables for Submission

With this type of business financing, you can sell some or all of your receivables. Select the ones you want to sell and submit those receivables to the factoring lender in order to submit your formal request for accounts receivable financing.

Step 3: Receivables Are Verified

After receiving the invoices, the factoring company verifies its validity with your customer(s). They ensure the invoices are accurate, including the outstanding balance and the due date.

Step 4: Cash Deposited into the Company’s Bank Account

Once the verification process is complete, if you’re approved, the advance process begins. The factoring lender deposits the capital into your business account. This typically takes 1-3 business days after approval, depending on your bank.

Step 5: Settle the Account

Your customers still make payments in your company’s name. Paper checks are cashed using a “lockbox” process, which allows the factoring company to cash checks written in your brand’s name legally. All electronic payments are deposited into a special account set up by the lender.
As soon as the payment clears, your account is settled.

Step 6: Repeat the Process

Getting another accounts receivable loan is a matter of repeating steps 2, 3, and 4. This allows you to improve business cash flow so you can run your company successfully without financial hiccups.

Come back next week for another installment in our Accounts Receivable blog series. With our help, you can learn everything you need to know about the incredible range of financing options your business has to choose from.