What Is Accounts Receivable Financing?

Invoices are money you’re owed. If you sign them over to someone else, they can collect the money. Some finance companies will buy invoices from businesses that can’t wait for the customer to pay. This is called accounts receivable financing, invoice financing, or invoice factoring. These finance companies realise that older invoices are less likely to get paid. So you probably won’t find anyone willing to buy your really old invoices.

Some finance companies will pay you up to 90% of the value of an invoice if you sign it over to them. It’s a way to get money you’re owed without waiting on a customer to pay.

The finance company will make a second (remainder) payment to you when the customer settles the invoice. You’ll never get the full value of the invoice, because the finance company takes fees. And they won’t buy old invoices so it’s not a dumping ground for bad debts.

Speak to your accountant or financial advisor before using these types of services.

What is a bad debt?

When invoices aren’t likely to be paid, you should write them off as a bad debt. It’s lost income, and it’s important to capture that in your accounting records – especially as you may have already paid tax on that invoice. And seeing as the income isn’t going to happen, you need to claim that tax back. You do this by writing off the invoice.

When should I write off a bad debt?

You should write off a bad debt whenever you think there’s no reasonable chance of getting paid. Your customer may have gone broke, or you might be locked in a dispute that’s not likely to be resolved, or they may simply be ignoring your reminders.

Whether you write it off after 6 months or 18, don’t give up on it.  Even after you’ve written off the debt, keep sending innvoice reminders. If they finally pay, you can always declare the income on your next tax return.

The importance of a good accounts receivable process

When everyone’s late paying, business gets hard. You might run out of money to pay suppliers or staff. It’s one of the most common reasons businesses go broke.

It’s important to treat invoices like the assets they are. Set up an accounts receivable process that maximises your chance of getting on-time payment. There’s a lot you can do.