When your business needs funding now there is nothing worse than knowing you’re waiting for invoices to be paid. Sure you could go back to investors to ask for more capital or go to a bank for a business credit card or loan, but when you have customers that owe you money, it’s fastest and easiest to simply get paid. If you have customers on a 30, 60 or 90 net term contract, you may have heard of Accounts Receivable Financing as an option to get paid more quickly. Below are some Frequently Asked Questions (FAQ) to help you understand AR Financing and decide if it’s for you.

How does accounts receivable financing work?

Accounts Receivable (AR) financing is a process through which you sell open invoices to a third party who then collects the debts for you. Unlike a collections agency, these companies are not pressuring your clients into payment. They continue to wait the 30, 60 or 90 days, but they pay you immediately for the invoice amount, minus a 5% or so “commission” rate.

What are the benefits of accounts receivable financing? 

AR Financing (sometimes called factoring) is beneficial because it allows you to get the money your business is owed immediately. Additionally, you don’t have to worry about whether or not you’ll get paid. When your business is small, paying this small rate to use a factor can save you the salary of an additional AR clerk, which can be a cost saving measure with huge benefits.

What are the negatives in AR financing?

You will want to be thoughtful before you decide to turn any of your customer’s invoices over to a factor. Since they will be collecting directly from your customers, it’s possible that your customers will be confused or turned off by the fact that an outside organization is collecting your invoices. As these companies become more popular and used more universally, this downside will likely become less important.

Do I have to sell all of my accounts in order to use a factor?

No. Unless you have a special contract with a factoring company that requires it, they are unlikely to demand that all invoices be sold to them. You can usually sell whichever invoices you want, and hang on to others. This is a great way to negate some of the negatives in this process. You can chose to personally collect on particular clients, but to sell invoices for other customers depending upon existing relationships, total amount due and other factors.

Deciding to sell invoices to a third party can be a very smart business decision, if you’ve weighed all of the benefits and negatives for your business. Consider the points above, and speak to a financial advisor if you have further questions about how this decision will affect you.