Why accounts receivable financing matters to a first-time founder
Accounts receivable financing can close the cash gap between delivering work and getting paid. It may provide cash without waiting 30, 60 or 90 days. However, fees, withheld reserves, repayment duties and reliance on a few customers can make it expensive or unavailable when invoices are disputed.
Examples of accounts receivable financing
A manufacturer has US$200,000 of invoices that qualify for financing and are due within 60 days. A provider advances 80%, or US$160,000, and holds the rest as a reserve. When customers pay, the provider releases what remains after fees, unless the contract requires deductions for unpaid or disputed invoices.
Common misunderstanding
This financing is not always a loan secured by invoices. Factoring may involve selling them, while invoice discounting and asset-based lending work differently. It also does not always transfer the risk that a customer will not pay. Some agreements require the business to repay advances on unpaid or disputed invoices.
When to use it
Consider it when reliable business customers pay slowly and the cash gap limits otherwise sound growth. Compare the full cost, percentage paid upfront, amount held back, repayment duties, contract restrictions, customer notice and control over collections. Get legal and accounting advice on the agreement and its treatment in your jurisdiction.