What is accounts receivable financing?

Too many unpaid invoices can affect business growth. But for many small business owners, a pile of unpaid invoices is a grim reality. If you are also struggling to stay afloat due to stacked accounts receivable, you can opt for accounts receivable financing to improve your business cash flow.



What is accounts receivable financing?

Accounts receivable financing, also known as invoice financing, is a type of financing option that allows you to access funds on your outstanding invoices. An accounts receivable finance company will provide you with capital of up to 100% of the total value of your unpaid invoice in exchange for a commission.

In other words, accounts receivable (AR) financing can help small business owners get paid early on their outstanding invoices in exchange for fees.

Accounts receivable financing should not be confused with invoice factoring. You sell unpaid invoices at a discount in invoice factoring, and the invoice factoring company takes full ownership of the unpaid invoices and collection of payments.

How does accounts receivable financing work?

Here’s how Accounts Receivable Funding works:

  • Your clients owe you $13,000
  • You contact an accounts receivable finance company with your application, invoice details and other documents
  • The company will review your request for accounts receivable financing and pay you $9,100 (70% of your accounts receivable). The amount of financing may depend on various factors, such as your type of industry, your personal and professional credit score, etc.
  • You will pay a weekly fee to the business until your customers pay their dues

Under an accounts receivable financing arrangement, your customers pay directly to your accounts receivable company. And the company pays you the remaining balance after deducting its fees and other applicable charges mentioned in the accounts receivable financing agreement.

Simply put, accounts receivable financing is a type of business loan where your unpaid invoices act as collateral.

Benefits of Accounts Receivable Financing

Here are the key benefits of accounts receivable loans over getting loans from traditional lenders:

  • Quick and easy application process
  • No collateral is required
  • Minimal paperwork
  • Flexibility to choose the capital amount based on your company’s outstanding invoices

Approval of accounts receivable financing is often dependent on your customers’ credit history. So businesses with poor credit may also qualify for accounts receivable financing.

Accounts Receivable Funding Costs

Total accounts receivable financing costs vary widely from company to company. There are often two types of costs associated with financing accounts receivable: the service charge and the interest rate. Sometimes companies also charge an invoice validation fee.

It is therefore recommended to receive quotes from several companies to choose the most economical option.

Is Accounts Receivable Financing Right For Your Small Business?

Accounts receivable financing or invoice financing can help small businesses improve cash flow, hire additional employees, purchase new equipment, build cash reserves, and improve their overall financial health. But is it fair to meet your small business expenses?

Here are the key questions to ask before applying for an accounts receivable loan:

  • Do you need capital immediately to meet seasonal demands?
  • Are you experiencing cash flow problems due to an accumulation of unpaid bills?
  • Is the cost of cash advances more than the expense of financing accounts receivable?
  • You are not able to pay the current expenses of your business?

You need to understand that accounts receivable financing can be more expensive than any other type of business loan. So, before you apply for an accounts receivable loan, you should first check all available financing options, such as business credit cards, traditional bank loans, and microloans.

Also, you should read these 11 ways to better manage your accounts payable and accounts receivable to improve your business cash flow.

Top Accounts Receivable Finance Companies

Here are the top accounts receivable finance companies to consider:

1. 1st trade credit

1st Commercial Credit is a leading invoice financing and factoring company. Having financed over 3400 customers, 1st Commercial Credit offers a wide range of financing solutions to help small businesses improve their cash flow and benefit from financial protection in difficult times.

You can set up your account for accounts receivable funding in 3-5 days. The company charges financing fees of 0.69% to 1.59%

2. Hose

If you run a SaaS business, Pipe may be your ideal choice for accessing working capital. It offers instant one-click payment. The company will help you turn your recurring income into initial capital.

3. Funding

If you use a QuickBooks Online account at your business, FundThrough may be one of the best invoice financing options. Its express invoice financing allows you to have capital the next business day. Plus, you can get 100% of your invoice amount as financing. And the process is completely online.

FundThrough is well suited for funding up to $15,000

4. Lendio

Lendio offers a wide range of loans for business owners, including SBA loans, business lines of credit, merchant cash advances and more. With Lendio, you can get capital up to 90% of accounts receivable.

5.PayPlant

If you are an Illinois State supplier, PayPlant may be your perfect bill financing partner. The company offers rates as low as 1.2% per month for businesses and app developers. And there are no costs or fees for providers in the state of Illinois.

6. Emblem

Crestmark specializes in offering various financial solutions for businesses. The company claims to disburse money to eligible borrowers within one business day. With Crestmark, you can get cash back on up to 90% of eligible invoices.

7. TCI Business Capital

TCI Business Capital is a household name in the market, offering monthly funding packages ranging from $50,000 to $7 million. The company serves trucking, manufacturing, oilfield services and more. Working with TCI Business Capital can help you receive same-day financing on your outstanding invoices.

8. altLine

altLine is a leading invoice finance and factoring company. The company claims to offer easy approval for its loan options. As a bank, altLine can reduce borrowing costs.

What are examples of accounts receivable?

Here is a great example of accounts receivable: a customer purchases goods worth $12,000 and pays $7,000 upfront and agrees to pay the remaining amount after 30 days. You will list $5,000 as accounts receivable on your balance sheet.

What are the common forms of funding to receive?

Common forms of receivables financing are invoice financing and invoice factoring. Invoice financing or accounts receivable financing is a way to get capital based on your unpaid invoices in exchange for a commission, where invoice factoring means selling your unpaid invoices (below their sales volume) for to get money.

Last thoughts,

Now you know all about accounts receivable financing and how it works. It’s time to learn how to get a small business loan. Of course, you will need to submit documents to apply for any funding. Reading a comprehensive guide to the small business loan documents you will need can help you significantly through the documentation process.

Image: Depositphotos


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