Financing your invoices can be a great way to manage cash flow while outsourcing some of your administrative work. For most small businesses that rely on invoice-based account management, that’s two benefits in a single product. Sometimes, the savings on labor from outsourcing your accounts even neutralizes the cost of financing. It all depends on how quickly your customers pay. If you’ve never worked with an accounts receivable financing company before, here are the basics you need to understand.

Financing Structure

Financed invoices don’t show up as debt on your company’s record because they’re considered to be debt owed by your customer to you, just with the financing company as designated payee. The financing company collects the payment, subtracts the advance and fees from it, and then sends the rest on to you. That gives you a portion of the invoice’s face value for working capital now and a back end payment you can plan on for profit when you customer pays. Keep in mind the fees vary according to how long the customer takes to pay, so that back end payment varies. Now, while the debt may not show up on your record, some financing companies do require recourse financing, especially for ongoing invoice credit lines.

Customer Communication

When you take advantage of accounts receivable financing, you need to let your customers know that payment processing has been taken over by a third party. Include a reassurance that this does not mean the account is past due or that its status has changed. Customers in good standing should continue to be considered so. Instead, explain that you are outsourcing the collection process and streamlining your own accounting, so customers know to expect this to happen from time to time. This makes it easy to reuse invoice financing for regular cash flow management.

How Often To Finance Your Invoices

Invoice advances are typically approved for a higher percentage of the invoice face value when they aren’t very old and your customers have a good payment history. One of the best ways to make sure you’re not financing a pool of invoices with a lot of old ones is by using accounts receivable financing on a regular basis. Financing every four weeks prevents you from keeping invoices longer than 30 days before you finance, which usually optimizes the quoted price. Of course, the fees for late payment can still add up if customers don’t pay when expected. Make sure your financing company understands what the customary payment windows for your customers are, too.