It’s quite common for companies that work with commercial clients to allow them to pay their invoices in 30 to 60 days. The downside to this is that not all companies have the cash reserves to wait that long for payments. But that’s where accounts receivable financing comes in. If you want to understand how accounts receivable financing works, continue reading.
Step 1: Due Diligence and Account Setup
If you want to use accounts receivable financing, the first step in the process is to perform due diligence so the account can be set up. Due diligence will allow the finance company to determine if your company can be financed or not. They usually check the credit quality of your clients, your receivables aging report, your corporate taxes, which should be up to date, and relevant background, among other things. Once due diligence is done, the contracts will be signed, the customer will get notified, and the account will be in place.
Step 2: Ready Your Receivables
Now that the account is set up, you will need to choose the clients and receivables that are going to be funded. Once you’ve done that, you will need to submit their invoices to the receivables financing company you’re working with. This can be done via email, fax, or through a secure website. Along with the invoices, you will have to provide a schedule of accounts, which will be the formal request for funding.
Step 3: Verification
The next step for the financing company is to verify the receivables with your customer. Verification is all about making sure that the amounts on the invoice are correct, that there aren’t any offsets and that they’re due in 30 to 60 days. This will help prevent any hiccups in the funding process.
Step 4: Financing the Receivables
Once the receivables have been verified, the invoices will be funded. The financing company will calculate the advance and they will make a direct deposit or a wire transfer into your bank account. The advance is simply the percentage of the invoice that’s funded, so it will vary from one industry to another, but the average is 80%. These advances are usually provided in a business day, but it will depend on the payment method. Wire transfers will be available the next day, but direct deposits can take a day or two, depending on the bank.
Step 5: Payments and Settlement
At this stage of the process of the accounts receivable, your customers will pay their invoices and once they do and the funds are received, the transactions will be settled. The remaining 20% of the advances will be rebated, minus a financing fee.