Accounts Receivable Financing
Owning a Business
in Boca Raton
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So, you live in Boca Raton and you run a business where you deliver a service, invoice the customer, and then they pay thereafter. But you’ve come to find that customers are not always timeous with their payments to your firm. There can be a lapse of between 1 to 2 weeks after the current invoice period where you still have to wait. But guess what? Your business isn’t waiting. People are still ordering your services; company cars need gas to get to appointments; you need the necessary items to complete jobs; and you still have payroll.
The best way to manage the obvious cash flow problems with regards to the lapse in your accounts receivable is to seek out accounts receivable financing.
Accounts Receivable Financing for Boca Raton Businesses
What Is Accounts Receivable Financing?
A company’s accounts receivable is the money its customers owe it. Bills owed to a company are those that it is entitled to collect after providing a service or product. Receivables, also known as accounts receivable, are a company’s way of extending credit to customers and are often due within a limited time frame. The presence of receivables indicates that a business has extended credit to a customer but has not yet received payment. As thus, the firm has effectively agreed to a short-term IOU from the customer.
How Does Accounts Receivable Financing Work?
Factoring is a common term for the business practice of financing accounts receivable, and factoring businesses are another name for this kind of lender. Although accounts receivable finance is the primary emphasis of the best factoring firms, factoring is something any lender may provide. Accounts receivable financing arrangements may take several forms, and lenders may be open to negotiating various terms and conditions.
Most forms of financing for accounts receivable resemble sales of the underlying assets being financed. Selling accounts receivable to a financier is a common form of financing for businesses. Capital is received by a company in the form of cash, which is then recorded as an asset on the balance sheet in place of the accounts receivable. A lender may advance up to 90% of the amount of invoices, depending on the arrangements.
Any time a business is due money for services given or goods delivered but has not yet been paid, a receivable is recorded. This might result from a consumer making a purchase on shop credit, or it could be the result of a subscription or installment payment schedule that requires payment after the recipient has received the products or services.
Money due to a business for services supplied is recorded as an asset on the books and is known as accounts receivable. On the other side, the company’s payables are the money it owes to other parties like vendors and creditors. Liabilities include amounts owed to others.
A lender may advance you up to 90% of the value of your receivables via accounts receivable financing. After deducting the lender’s fees and any applicable ones, you will get the remaining percentage upon client payment of invoice.
Fees for accounts receivable financing are usually a fixed percentage of the invoice total, anything from 1% to 5%. The costs you incur depend on how long it takes your client to pay their invoice.
- You decide to finance an invoice for $50,000 at 60 days. After submitting your application for accounts receivable finance, you hear back from the lender that they are willing to advance you $40,000, or 80% of the total amount you will be able to borrow.
- The money you borrow is then used toward company costs. Each week that it takes your customer to pay the invoice results in a 3% fee charged by the lender.
- After three weeks, your client pays the invoice you sent them. A total of $4,500 is due to the lender (3% of $50,000, or $1,500 every week, multiplied by 3 weeks).
You’ve just received payment from the client; you retain $5,500 for yourself and pay back the lender the initial loan plus costs ($44,500 total). The total costs you paid were $4,500, which works out to an annual percent rate (APR) of around 65.7%.