3 Steps To Using AR Financing for Working Capital
Working capital is the lifeblood of any business. You need it to manage cash flow and account for hiccups in the timing of your incoming payments, but you also need it to invest in the tools that help your business grow, like marketing campaigns or an expanded workforce. That’s why it’s important to know how to finance working capital when opportunities present themselves, and accounts receivable financing is a popular option.
- Submit All Your Invoices
If you want to maximize the amount of capital you receive, you have to send the biggest pile of invoices you can. Some lenders even require that you submit all your outstanding invoices at once. Even when that is not the case, it often lowers the cost of financing to do so by diluting the risk posed by individual defaults on invoices.
There are only limited circumstances where this is not advisable, like when you have the option to leave out invoices that are already drastically late to avoid the penalty fees they would bring. Understanding these limited circumstances can help you know when to occasionally break your usual routine, but it should not happen often unless you tolerate customers who don’t pay you.
- Set a Budget
Financing your accounts means foregoing most of the money that comes after repayment to access the bulk of it now. In most cases, there is a small residual payment after every invoice is covered and the cost of the deal taken out, but you need to set your operational budget for at least the next month using the working capital you now have from financing your invoices.
The remainder of the money after your cash flow budget is figured out will become the working capital you have for projects like marketing campaigns or equipment purchases. When that second round of payment does come in, you can either use it as more working capital or count it as additional income for dividends or savings.
- Repeat as Needed
The nice part about accounts receivable financing is that you can submit new invoices whenever you need the working capital, which means that you can keep financing each month’s invoices to set the budget for the next month and allocate additional working capital to your growth projects. Once those projects are handled and your cash reserves allow you to maintain a solid cushion for your cash flow, you can break the pattern of invoice financing until the next time you need to discipline your budget for a growth spurt.