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Accounts Receivable Financing

Many businesses have clients who prefer to pay them over time. The business receives the order, fulfills it, and waits weeks or even months to get paid. This payment delay can cause cash flow problems for the company, limiting business growth by negatively affecting working capital. To solve cash flow problems, many companies opt for accounts receivable financing or invoice factoring.

What is Accounts Receivable Financing?

Notebook showing accounts receivable payments.

Accounts receivable is the outstanding balance of invoices billed to customers. Simply put, it is the money owed to a company. Accounts receivable financing allows the company to access the outstanding capital that is tied up in unpaid invoices. The lender will advance the company with the outstanding capital and charge a monthly fee. Most applications are online, and submission takes only a few minutes. Invoice discounting rates vary from one lender to another. However, in most cases, the lender charges monthly fees ranging from 1.25% to 5% of the invoice value, based on the accounts receivable financing agreement. The funding term is up to 90 days.

Qualifications

Requirements vary. Businesses seeking to qualify for accounts receivable financing may need to provide 12 months of financial history. The lender will likely assess the business owner’s receivables and purchase orders.

The business owner’s credit is not as crucial as the debtor’s credit score. The reason being is that the accounts receivable financing company will be collecting the funds from the client and not the small business owner.

Therefore, if the client has a good history of repaying debts, the business owner may be approved for accounts receivable financing.

Consequently, lenders will be wary of doing business with companies that work with clients that have failed to repay their outstanding invoices in the past.

Maximum Funding Amount

Up to 80% of the Account Receivable

Funding Term

Up to 90 days

%
Interest Rates

5% to 12%

Time to Funds

Soon as one business day

Advantages

  • Accounts receivable financing speeds up cash flow while waiting for customers to pay.
  • AR financing is sometimes more affordable than other types of financing, such as a bank loan or a traditional loan.
  • The collateral associated with receivable factoring is the money owed to you by your client. This can mean less risk of losing the property you already have.
  • Some borrowers find it easier to qualify for invoice factoring than other loan products.
  • You may receive your funding in as little as two business days.
  • The loan amount can be much higher than through other forms of financing.

Disadvantages

  • Those with excellent credit may find a better rate through a loan product that considers their score. For instance, a traditional business loan may be less expensive.
  • The lender may need to investigate your client’s finances. Your client might not want this to happen. Chances are they won’t be contractually obligated to help, either. This can lead to an awkward situation for you.
  • Another disadvantage is that you’re paying money to the factoring company to get the money already owed to you. That can be frustrating, especially when it takes your client longer than expected to get you your money.

Required Documents

To apply for accounts receivable financing, business owners may need to present the following documents:

  • Government-issued ID card
  • Three months of business bank statements
  • Outstanding receivables

Accounts Receivable Funding Companies

Businesses can get started by comparing the following lending companies that specialize in accounts receivable financing.

BlueVine

BlueVine provides funding from $20,000 to $5 million. The application process is relatively fast and straightforward. Business owners can enter the information manually or link their accounting software with BlueVine to upload the accounts receivable financing data. BlueVine may advance up to 90% of the invoice and charge a 0.4% to 1% weekly fee of the outstanding amount. The business owner’s customers should direct their payments to the P.O. box address given to them.

To be eligible for an accounts receivable loan from BlueVine, businesses must meet the following requirements (as well as others):

  • Be in operation for at least three months
  • Have a credit score of 530
  • Have an annual business revenue of at least $100,000 on your balance sheet

The American fintech company has been in business since 2013. It was founded by Eyal Lifshitz, a venture capitalist who realized that the small business funding process could be simplified online.

Fundbox

Another popular accounts receivable funding company is Fundbox. Borrowers can receive funding from $100 to $100,000. Similar to BlueVine, the application process is fast because it plugs into your accounting software. Fundbox can advance up to 100% of the unpaid invoices, charging a 0.4% to 0.8% weekly fee of the accounts’ value.

Businesses may need to meet the following requirements (amongst others) to be eligible for invoice financing from Fundbox:

  • Be in operation for at least three months
  • Have an annual business revenue of $50,000 on your balance sheet

Fundbox launched to the public in 2014. Eyal Shinar, one of the co-founders, found his inspiration for the company from the experiences of his mother. Eyal’s mother operated an employment agency in Israel, and she struggled to make her payments on time. The stress and trials associated with this helped Eyal discover the need for a company like Fundbox.

Is Accounts Receivable Financing Right for You?

Accounts receivable financing is based on outstanding invoices, and any company with outstanding receivables may qualify. This type of financing can be beneficial for companies experiencing a cash-flow shortage because of their outstanding invoices. If this is the case with your company, then accounts receivable financing may be right for you.

If you have unpaid invoices but your company is doing well, accounts receivable financing may also be right for you if you want to collect those unpaid invoices faster.

Accounts Receivable Financing vs. Invoice Factoring

Accounts receivable financing and invoice factoring are two ways to fix your business’s cash flow problem using your outstanding receivables. In both cases, the business’s invoices are used as collateral, and they may receive funding in as little as one business day. So if the benefits of accounts receivable financing are the same as invoice factoring, what makes them so different from each other?

Accounts Receivable Financing

Accounts receivable financing companies lend businesses money based on their outstanding receivables. Financing companies typically lend around 80% of the business’s unpaid invoices. In addition, the lending company charges a monthly fee for their service plus interest on the amount borrowed. Accounts receivable financing rates range from 1.25% to 5% of the invoice value.

The financing company is responsible for collecting the money from the business’s clients. But in some cases, the business owner is responsible for managing their clients’ money and paying the lending company back.

Invoice Factoring

Invoice factoring companies purchase a business’s outstanding receivables and advance up to 90% of the total invoice balance. The invoice factoring company is responsible for collecting the money from the business’s clients. After the customer has made their payment, the factoring company will pay back the remaining balance to the business, excluding additional fees such as processing fees and factor fees.

Comparative Table

Below is a table to help you better understand the difference between the two financing options.

Accounts Receivable Financing
Get an advance based on your outstanding invoices
  • The accounts receivable financing company collects your money from your clients and returns the difference to you.
  • You pay back the financing through monthly payments.
  • In some cases, you may be responsible for managing your money from your customers.
Invoice Factoring
Sell your outstanding invoices in exchange for cash (around 80% of the invoices value)
  • The invoice factoring company collects your money from your clients and returns the difference to you (minus its fee, which varies based on your industry, how long it takes your customers to pay, and other variables)

Wrap-Up

A receivable financing solution can help businesses fill cash flow gaps between completing a service and waiting for the clients to pay. This financing option is a way to address cash flow gaps and leverage your unpaid invoices to receive capital.

Frequently Asked Questions

How does accounts receivable financing work?

Accounts receivable financing is a form of short-term funding. The financing company advances up to 90% of the value of your business’s accounts receivable and pays the remaining 10% of the balance once they have collected the money from the clients. The rates vary from one financing company to another, but the monthly fee ranges from 1.25% to 5% of the invoice value. The funding term is up to 90 days.

What are the advantages of accounts receivable financing?

Accounts receivable financing can speed up cash flow while waiting for your clients to pay. In addition, the loan amount may be higher, more affordable, and quicker than traditional loans.

Is accounts receivable financing better than a traditional loan?

Businesses that apply for accounts receivable financing may qualify for more affordable terms and higher amounts than a traditional loan. The funding process may also be faster.

Can i get accounts receivable financing with bad credit?

The business owner’s credit is not as crucial as the debtor’s credit score. The reason being is that the accounts receivable financing company will be collecting the funds from the client and not the business owner. However, most accounts receivable financing companies require a minimum business credit score of 530.

Is this financial product right for you?
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