What is Accounts Receivable Financing?

accounts receivable financing

Too many unpaid invoices can affect business growth. But for many small business owners, a stack of outstanding invoices is a grim reality. If you’re also struggling to stay afloat due to piled-up accounts receivable, you can opt for accounts receivable financing to improve cash flow in your company.

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 account receivable financing company will provide you with capital up to 100% of your total outstanding invoice value in exchange for a fee.

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

Accounts receivable financing should not be confused with invoice factoring. You sell unpaid invoices for a discounted price in invoice factoring, and the invoice factoring company takes full ownership of unpaid invoices and collecting payments.


How Does Accounts Receivable Financing Work?

Here is how accounts receivable financing works:

  • Your customers owe you $13000
  • You reach out to an account receivable financing company with your application, invoice details, and other documents
  • The company will review your accounts receivable financing application and fund you $9100 (70% of your account receivable). The funding amount may depend on various factors, such as your industry type, personal and business credit score, etc.
  • You will pay a weekly fee to the company until your customers clear their dues

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

Put simply, accounts receivable financing is a type of business loan for which your outstanding invoices work as collateral.

Accounts Receivable Financing Benefits

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

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

Approval of accounts receivable financing often depends on your customers’ credit history. So, businesses with poor credit can also qualify for accounts receivable financing.

Accounts Receivable Financing Costs

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

So, it is recommended that you should receive quotes from multiple companies to pick 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 inflow, hire additional employees, buy new equipment, build cash reserves, and improve overall financial health. But is it right to meet your small business expenses?

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

  • Do you need capital immediately to meet seasonal demands?
  • Are you facing cash flow problems due to a stack of unpaid invoices?
  • Is cash advance cost higher than the expense of accounts receivable financing?
  • Are you not able to pay day-to-day business expenses?

You must understand that accounts receivable financing may be costlier than any other type of business loan. So, before applying 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 payables and accounts receivables to improve cash flow in your business.

Top Accounts Receivable Financing Companies

Here are the top accounts receivable financing companies to consider:

1. 1st Commercial Credit

1st Commercial Credit is a leading invoice financing and factoring company. Having funded 3400+ clients, 1st Commercial Credit offers a wide range of financing solutions to help small businesses improve cash flow and have financial protection in tough times.

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

2. Pipe

If you are running a SaaS company, Pipe can be your ideal choice for accessing working capital. It offers a one-click, instant payout. The company will help you turn your recurring revenue into upfront capital.

3. FundThrough

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

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

4. Lendio

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

5. PayPlant

If you’re an Illinois state vendor, PayPlant can be your ideal partner for invoice financing. The company offers rates as low as 1.2% per month for businesses and app developers. And there is no cost or fee for Illinois state vendors.

6. Crestmark

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

7. TCI Business Capital

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

8. altLine

altLine is one of the leading invoice financing and factoring companies. The company claims to offer easy approval for its lending options. Being a bank, altLine can reduce borrowing costs.

What are Examples of Accounts Receivable?

Here is an excellent example of accounts receivable: a customer buys goods worth $12000 and pays $7000 upfront and agrees to pay the remaining amount after 30 days. You will show $5000 as accounts receivable on your balance sheet.

What Are the Common Forms of Receivable Financing?

The common forms of receivables financing are invoice financing and invoice factoring. Invoice financing or accounts receivable financing is a way of getting capital based on your unpaid invoices in exchange for a fee, wherein invoice factoring means selling your outstanding invoices (lower than their sales volume) to get money.

Final Thoughts,

Now you know all about accounts receivable financing and how it works. It is time to learn how to get a small business loan. Of course, you will be required to submit documents to apply for any financing. Reading a complete guide to the small business loan documents you’ll need can significantly help you in the documentation procedure.


Image: Depositphotos

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Sandeep Babu Sandeep Babu is a staff writer for Small Business Trends as well as a freelance writer. He regularly contributes to leading online publications and writes for his own blog Quick Scream.

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