Q: What is A/R Financing?
A: A/R Financing is the purchase of accounts receivable at a discount for immediate cash. A/R Financing gives businesses the power to ensure growth without diluting equity or incurring debt.
Q: What do lenders look at when deciding whether or not a company’s accounts receivable can be financed?
A: Making sure that your accounts receivable is healthy is good for your business, and will help you get the financing you need. Here are three items that lenders consider when they evaluate your A/R.
Q: Do you have a concentration risk? (Are you putting all of your eggs in one basket?)
A: Lenders generally don’t want to see any more than 20-25% of your A/R owed by any one customer. There are many justifiable concerns that a lender may have, if too much of your business is dependent upon any one customer.
A lender must consider whether or not your business could survive if your largest customer goes bankrupt, finds another supplier of goods or services, or refuses to pay because of a dispute. The lender will want to feel certain that you will be able to find enough additional customers to keep your company in business. The less you are dependent upon any one customer, the more attractive your A/R will be to a lender.
Q: What is the credit worthiness of your customers?
A: Lenders that finance accounts receivable look to the credit worthiness of your customers, rather than your credit strength. Just like you, they want to ensure themselves that they will be paid. No one wants to spend time, effort, and considerable expense in providing goods and services to someone that can’t or won’t pay their bills. A lender will want to understand the credit check process your company utilizes in determining whether or not it is willing to do business with a new company.
Q: What is your dilution percentage?
A: Lenders also want to know for each $100 that you bill, how much do you actually collect – $98, $88, $70? The lender will want to know whether your customers generally pay you the face amount of your invoices, or rather are there often offsets, short pays, disputes, processing fees, etc. This may indicate problems in your operations such as billing or paperwork problems. Lenders need to feel confident that when you bill $100, you will collect $100. If a lender gives you a 90% advance rate, but you only collect $88 on the $100 billed, the lender will be unwilling to continue to advance you funds.