In the world of business, cash flow is king. Regardless of the sector in which your company operates, having a healthy cash flow is crucial to maintaining the day-to-day operations and facilitating growth. One innovative financial instrument that many businesses are turning to, to improve cash flow, is accounts receivable (AR) financing, also known as AR finance.
This article will serve as a guide to understanding AR finance and how it might benefit your business in the UK.
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Understanding AR finance
In its simplest form, AR finance is a type of asset-based lending that turns outstanding invoices into immediate cash.
Businesses that provide goods or services typically generate invoices that are paid on terms, usually 30, 60, or 90 days.
With this type of finance, instead of waiting for customers to pay within those terms, a business can sell its receivables (invoices) to a finance company, also known as a factor.
The factor pays the business a percentage of the value of the invoice up front and then takes on the responsibility of collecting the invoice payment from the customer.
The benefits of AR finance
AR finance offers several key advantages that can be particularly beneficial for small to medium-sized businesses.
Improved cash flow: The most obvious advantage is the immediate improvement in cash flow. Instead of waiting for 30, 60, or 90 days for payment, businesses can receive cash almost immediately. This can be particularly useful for businesses experiencing rapid growth, seasonal fluctuations, or those dealing with late-paying customers.
Flexibility: this type of finance is not a loan, so it doesn’t create a liability on your balance sheet. This makes it a flexible financing option that can scale with your business. As your sales grow, so does the amount of financing available to you.
Outsourced credit control: When you sell your invoices to a factor, they take on the responsibility of collecting payments. This means your business can potentially reduce overheads related to credit control and debt collection, freeing up more time for you to focus on the core aspects of your business.
Is AR finance right for your business?
While AR finance offers several advantages, it’s not a one-size-fits-all solution. It’s most suitable for businesses that offer credit terms to their customers and have a high volume of invoices. Businesses with reliable customers who have a good track record of paying their bills are also more likely to benefit from this form of finance.
It’s also important to note that factors typically charge a fee for their services, which can range from 1% to 5% of the invoice amount. This cost needs to be weighed against the benefits of improved cash flow and reduced administrative overheads.
The UK market for AR finance
The UK market for AR finance is robust and growing. As of 2021, the value of invoices financed in the UK stood at £62 billion. Numerous providers, from traditional banks to fintech companies, offer AR financing services, making it an accessible option for businesses of all sizes.
In conclusion, AR finance is a flexible, effective tool for managing cash flow and reducing the administrative burden of invoice collection. As with any financial decision, businesses should carefully consider their specific needs, customer base, and the costs involved. Consulting with a financial advisor or an AR financing specialist can provide further guidance tailored to your business situation.
AF finance FAQ
Typically, once an agreement is established with a factoring company, funds can be made available within 24 to 48 hours of an invoice being issued.
AR finance is common in many sectors, but it’s especially prevalent in industries where long invoice payment terms are the norm, such as manufacturing, wholesale, transport, and recruitment agencies. However, any business that issues invoices with payment terms could potentially benefit from this type of finance.
This depends on the type of agreement you have with the factoring company. In a “non-recourse” agreement, the factor assumes the risk of non-payment. In a “recourse” agreement, your business would be responsible for repaying the factor if the customer doesn’t pay the invoice.
This depends on the specifics of your arrangement with the factoring company. In some cases, your customers may not even be aware that you are using a factoring service. In other cases, particularly if the factor takes on responsibility for collecting payments, there could be a shift in the relationship. It’s important to discuss this aspect with the factor and consider the potential implications for your customer relationships.
Yes, AR finance is accessible to businesses of all sizes. In fact, it can be particularly beneficial for smaller businesses and startups that may not have extensive credit histories or assets to use for traditional loans. The key requirement is that the business has customers that reliably pay their invoices.
Unlike a traditional loan, AR finance does not create a debt that needs to be repaid over time with interest. Instead, it’s a way of getting paid sooner for work that has already been completed. This makes it a more flexible solution that scales with your business. However, the costs can be higher than a traditional bank loan, so it’s important to weigh up these factors when considering this form of finance.
AR finance is not currently regulated by the Financial Conduct Authority (FCA) in the UK, but providers are usually members of industry organisations, such as the UK Finance, that provide guidelines and codes of conduct to ensure fair and ethical practices.