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Receivables Finance for Small Businesses: What Is It & How Does It Work?

Receivables finance is a time and cost-effective funding solution for small businesses that have working capital tied up in open invoices. So, how does it work?

It is no secret that in order to grow a company, business leaders need to consider cash flow. A poor cash flow means limited capital for creating growth opportunities. It can also threaten a small business's ability to keep up with everyday operations. 

Receivables finance is an excellent option for SMBs looking for a fast and easy way to earn a short-term type of funding. With this finance option, invoices serve as collateral, as it is its own asset.


What is Receivables Finance? 

Receivables finance is a finance solution that allows organizations to obtain access to working capital against open invoices from customers and clients. Perhaps you're more familiar with the terms invoice finance or invoice trading as they are synonymous with receivables finance. 

Unlike traditional small business loans, customer invoices serve as collateral on the capital you obtain. As a result, many companies find that receivables finance is easier to qualify for because it is not dependent on a personal credit score or other lending minimum requirements. 

Invoice finance is an attractive funding option for B2B and service-based businesses. Unfortunately, these organizations are more susceptible to cash flow problems because they depend on customers to pay invoices on time. However, companies that rely on invoice trading are paid almost immediately instead of the 30, 60, 90-day payment cycle.


How Does Receivables Finance Work?

Receivables finance is the most accessible form accessing funds working capital that is tied up in open invoices. It often takes place in three stages:

  • Stage #1: Company ABC sells their invoice on a finance marketplace such as Crowdz
  • Stage #2: Company ABC receives a large portion of the open invoice, such as 95%, of from a funder
  • Stage #3: The customer of Company ABC pays its invoice in its entirety on time, and Company ABC sends the payment, in full, to the funder

Let's use an example with actual figures to make the process more clear:

Company ABC has an open invoice of $10,000, which is due in 60 days. However, the business needs this money sooner to effectively grow its operations and pay its employees. As a result, Company ABC works with a receivables finance company to receive the money almost immediately rather than having to wait 60 days. 

The receivables finance company reviews the payment history of Company ABC's customer. After verifying the customer's creditworthiness, the invoice is sold to a funder. The funder purchases the invoice at a 5% discount, so Company ABC receives working capital in the amount of $9,500, nearly two months prior to the invoice due date. 

60 days later, the customer pays Company ABC the full $10,000. Once this transaction is complete, Company ABC sends the $10,000 to the funder. So overall, Company ABC got to quickly obtain funds and continue operating business without waiting for customers to pay the money back in 60 days, and the funder of the invoice received a return on the purchase. 


What Are the Benefits of Receivables Finance for Small Businesses?

Your small business revolves around selling a service. In some, or perhaps, most scenarios, the transaction is done on credit. In other words, clients don't pay immediately for their purchased services. 

The customer is given an invoice with the payment plan, including the total amount due and the payment's due date. While this is common practice for most B2B companies, delayed payments often result in cash flow challenges. Your company is left with tied up funds that should be used to invest or grow operations. 

As a result, many businesses choose to finance their invoices. The benefits of doing so include:

  • Access to immediate funds to reinvest in operations and growth
  • Improved working capital
  • Only pay back funders once money comes back in
  • Determine how much money you need – and how often
  • Easier time taking on new customers because of the influx in cash 
  • Easier time paying employees and suppliers


Improve Your Cash Flow with Crowdz

We understand that every dollar counts and want to help your business flourish. Our powerful finance platform allows businesses to accelerate cash flow, unlock new growth opportunities, and break free from lengthy payment terms. 

Click here to start selling invoices today!

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