Starting out in the business industry as a fresh, new entrepreneur can seem a bit daunting at first, but once you know all of the business terms up your sleeve, you’ll be ready to burst into the industry confident because of all the knowledge you have obtained. One of the things you will have to know is the accounts receivable financing, which is also known as accounts receivable, factoring, or A/R for short.
What it is
TAB Bank explains accounts receivable financing is the way that you obtain money for companies by selling receivables. Whereas accounts receivable is the total amount of money that is owed by the customers because they have purchased from your company, but have not yet paid for your services or goods.
If customers have not yet paid what they owe your business, but you are in need of the cash flow right away, then you can purchase the receivables, which are called factors. However, you will probably be purchasing your receivables at a lower cost than what it actually is, so this method is preferred if you are in an instant need for cash.
For example, if the customers owe you a total of $2 million, and you need it right away, you would purchase the receivables from an accounts receivable financing company, or factoring company, at $1.6 million.
Why it matters
The procedure of accounts receivable financing seems confusing and complicated, but the gist is very easy to understand: if you are in current need of money for your business and someone owes you cash for your company, using the accounts receivable financing method allows you to obtain the money now, rather than in the future.
This can also help you free up some of your debt if you are struggling with your capital. Using the factoring method, you will be able to attend to the issues of your business immediately.