Accounts Receivable Financing: 6 Steps to Free Up Cash Flow

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What Is Accounts Receivable Financing?

Accounts receivable financing is asset-based financing that allows business owners to access capital that’s secured by outstanding invoices. An accounts receivable financing company will advance you up to 100% of the value of a given outstanding invoice, but they’ll charge a fee from the value each week it takes your customers to pay the invoice in full.

While accounts receivable financing technically isn’t a business loan, the structure is similar—however, with accounts receivable financing, the unpaid invoices serve as collateral so you’re not required to provide additional collateral. Additionally, as long as your customer pays the invoice as expected, you do not have to make any payments to the accounts receivable financing company.

Because the invoices serve as collateral, accounts receivable financing can be a great solution for borrowers with bad credit. In fact, lenders won’t be as interested in your credit history as in the quality of your invoices.

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How Accounts Receivable Financing Works

The goal of accounts receivables financing is to free up a small business’s cash flow that is currently tied up by unpaid invoices. It’s a tool that helps your small business manage cash flow, continue to pay your employees and suppliers, and invest in business growth faster and more easily than if you waited for your customers to pay their invoices.

Accounts receivable financing works like this:

  1. Select the receivables you’d like to finance.
  2. Apply for funding with an accounts receivable financing company.
  3. The lender advances you a portion of the invoice’s face value, usually 80% to 90%, but up to 100%.
  4. You use the funds to pay for business expenses. The lender charges a weekly fee until the customer pays the invoice.
  5. Your customer eventually pays the lender directly for the invoice.
  6. The lender deducts their fees (based on how long the customer took to pay) and advances the remaining amount of money to you.

Most accounts receivable financing is recourse financing. This means you are ultimately responsible for your customer paying the invoice. In some cases, the accounts receivable company will take over the collection process and follow up with the customer for payment. However, if the customer doesn’t pay, you must settle the debt with the financing company.

Accounts receivable financing is also known as invoice financing, A/R financing, and a ledgered line of credit. When you’re reading about and researching accounts receivable financing, keep your eye out for these other names.

Apply for A/R Financing

How to Apply for Accounts Receivable Financing

One of the benefits of accounts receivable financing is that it’s often easier to qualify for than conventional business loans. That’s because the invoice financing company’s lending decision is based on the quality of the invoices—not on your financial qualifications as a borrower.

Since your invoices are used as collateral, the cost of accounts receivable financing is based on the age, quality, and amount of the invoices you currently have outstanding.

Effectively, the invoice financing company will determine whether to approve your loan and assess the interest rate based on how quickly and easily they would be able to collect payment for the invoice.

As a result, you may still be eligible for accounts receivable financing even if you don’t have a stellar financial history or great credit.

Eligibility Requirements

To be eligible to receive accounts receivable financing, you’ll need to meet the following requirements:

  • B2B or B2G business that invoices customers
  • At least six months in business
  • $50,000 or more in annual business revenue
  • Have outstanding receivables
  • Creditworthy customers

Most accounts receivable financing companies will also examine the business credit rating of your customers. Strong customer repayment history is a good indicator that you’re eligible.

Required Documents

Compared to traditional financing, applying for accounts receivable financing is a pretty simple process. When you apply for accounts receivable financing, you’ll need to submit:

  • Outstanding invoices
  • Driver’s license
  • Voided business check
  • Bank statements

Many accounts receivables financing lenders have online portals that sync up with QuickBooks, Xero, and other accounting or invoicing software to help streamline the process.

Apply in 6 Steps

The application process for accounts receivable financing is a lot quicker than applying for a bank loan. In most cases, you should be able to get approved and have the funds in your business bank account within just a day or two. If you’re submitting large corporate or government invoices for financing, things might take a little longer.

Follow these six steps for financing accounts receivable.

Step 1: Collect Required Documents

Before you submit an application to the lender of your choice, gather all of the documents that you’ll need to prove your identity, inform the lender about your business’s financial history, and what receivables you have outstanding. If you use accounting or invoicing software, know your username and password beforehand. 

Step 2: Choose Which Receivables to Finance

Most accounts receivable financing companies have an online portal where you can check the status of your paid, unpaid, and financed invoices. Kind of like invoicing software, the portal gives you an overview of all of your accounts receivables. Inform the lender which specific invoices you’d like to finance.

Step 3: Submit Your Accounts Receivable Financing Application

Each lender will have a specific process for submitting your application, but most applications are online and submission takes only a few minutes.

Step 4: Receive Your Initial Accounts Receivable Advance

The lender will advance you a portion, usually 80% to 90%, of the face value of the uncollected receivables they approve for financing. For example, if you submitted $50,000 of invoices for financing, the lender might advance you $42,500 initially. The advance amount will vary based on the lender’s policies and the creditworthiness of your customers.

Step 5: Your Customer Pays the Invoice

Since the financing company is financing your receivables, they will receive payment from your customers. So instead of paying you, your customers will send payment on the invoice to the financing company. It’s your responsibility to update your customers with the new payment address (note this means that your customers might become aware that you’re financing receivables).

Step 6: Receive the Balance From Your Lender

Once your customer pays the invoice, the lender will deduct their fees and send you the remaining balance.

Best Accounts Receivable Financing Companies

In your search for accounts receivable financing, you will come across many lenders. It’s important to compare what they each have to offer, so you can find out which lender is the best fit for your small business.

Here are two top accounts receivable financing companies to consider:

BlueVine

BlueVine is a popular small business accounts receivable provider. You can submit unpaid invoices to get credit lines between $20,000 and $5 million. They can approve you within 24 hours and then get funding into your bank account within one to two business days. After the initial application, you can get repeat applications funded even more quickly.

The application process with BlueVine is really fast. You can link up your accounting/invoicing software with the online application to quickly upload the data on your unpaid invoices. Alternatively, you can enter the information manually.

BlueVine will advance you 85% to 90% of the invoice amount right away and charges a 0.4% to 1% weekly fee while the invoice is outstanding (there’s a three-week payment minimum). They’ll give you a PO box address that you can forward to your customers to direct their payments.

To qualify for BlueVine, you should have a credit score of 530, annual business revenues of $100,000, and at least three months of business operating history.

Fundbox

Fundbox is another accounts receivable financing company that offers a completely online experience. You can funding from $100 to $100,000. Just like BlueVine, the application process is really fast because Fundbox plugs into your accounting/invoicing software.

The difference is that Fundbox gives you access to more capital than BlueVine. You can get financing for 100% of the face value of your invoice with Fundbox. However, Fundbox is more like a traditional loan or line of credit in the repayment method. The customer pays you directly, not Fundbox, and you pay Fundbox weekly over a 12 or 24 week period.

Fees are slightly lower than BlueVine, coming in at 0.4% to 0.8% of the invoice’s value each week. To qualify for Fundbox, you should ideally have three or more months of business operating history and $50,000 in annual revenues. They do not check your credit.

Apply for A/R Financing

Is Accounts Receivable Financing Right for Your Business?

Almost every small business owner who invoices customers has probably received a late payment at some point. In fact, nearly 60% of invoices are paid late. Invoice financing provider Fundbox estimated that if all invoices were paid on time, U.S. small businesses could collectively hire 2.1 million more employees, which would reduce U.S. unemployment by 27%.

Your business might be a good candidate for accounts receivable loans if you invoice business customers and are facing any of the following problems:

  • Short-term cash flow shortage
  • Cannot meet seasonal demands
  • You see a business opportunity but don’t have the cash reserves to capitalize on it
  • You need to pay your employees, suppliers, or regular bills while awaiting invoice payments
  • You want to reinvest in your business or make improvements
  • Your supplier is offering a temporary discount that you want to take advantage of
  • You want to hire additional employees to grow your business or fill a seasonal need

In simplest terms, accounts receivable loans provide your business with immediate, flexible cash that you can use for any of your business needs.

This is especially important for businesses that invoice customers for large amounts of money and don’t receive payment for a long time. This might happen with multi-phase contracts, corporate clients, or government contracts.

business line of credit or business credit card can sometimes tide you over when If you face a cash flow problem. But you might not be able to qualify for an affordable line of credit, or the credit limit might not be high enough on your business credit card. In those cases, accounts receivable financing can be a good option.

Accounts Receivable Financing: Pros and Cons

There are a lot of reasons to use accounts receivable financing to fund your small business. But not every loan product works for every business. Accounts receivables financing is essentially short-term financing, so it can be expensive or simply the wrong choice for certain businesses. Make sure you weigh the pros and cons before going forward.

You’ll notice the last point on our list was featured as both a positive and a negative. Depending on the reliability of your customers and their financial histories, this might be a negative (higher interest rate) or a positive (easy loan approval, low interest rate). When the cost of accounts receivable financing gets converted to an APR, it comes to around 13% to 60%, but the harder the lender thinks collecting the invoice will be, the higher the APR will be.

For a business with a mediocre financial history, accounts receivable financing might be their best option. Some businesses won’t be able to qualify for traditional bank loans but will be able to qualify for accounts receivable financing.

Cons of Accounts Receivable Financing

  • The lender charges a fee each week that the invoice is outstanding.
  • Customers might have to send payment on the invoice to the financing company directly.
  • AR financing could have invoicing minimums.
  • You’re responsible if your customer doesn’t pay the invoice.
  • More expensive than business credit cards and traditional lines of credit.
  • Qualification and interest rate are based on the credit of your customers.

Pros of Accounts Receivable Financing

  • Frees up cash flow while waiting for customers to pay.
  • Simple application process.
  • Speed: You can get funding in one to two business days.
  • Amount of funding changes dynamically based on the value of the invoices
  • Invoices act as collateral, so no additional collateral is necessary.
  • Don’t have to reapply each time you need cash
  • Approval and interest rate are based on credit of your customers, not your own credit.

Accounts Receivable Financing vs. Invoice Factoring

As you research whether accounts receivables financing may be the right choice for your business, it’s important to distinguish this small business borrowing option from a commonly confused alternative—factoring financing.

Both accounts receivable financing and invoice factoring allow you to access funding based on the value of your receivables, but they’re not the same thing. The distinctions between the two can have a dramatic impact on the cost of your financing, as well as on your customer’s experience in paying for your goods and services.

Accounts Receivable Financing

Through accounts receivable financing, the accounts receivable financing company advances you money (80% to 90% of the invoice value) based on your business’s outstanding invoices. This type of financing takes the form of a loan agreement. You maintain control over your customer relationships and communications and are ultimately responsible for ensuring that the customer pays for your goods or services. Upon receiving payment from your customers, the lender will deduct their fees and send the remaining balance.

If you take out an accounts receivables finance loan and your customers pay their invoices earlier than expected, you will typically have the opportunity to pay off your accounts receivable loan ahead of schedule with no prepayment fee.

Accounts Receivable Factoring

With accounts receivable factoring, a lender purchases the balance of your outstanding invoices for 80% to 90% of their face value. For instance, if you have $30,000 in unpaid invoices, the lender might pay you $25,500 for those invoices. At that point, the invoice factoring company takes on the debt of those outstanding invoices, reaching out directly to your customers for repayment.

The most distinct difference that you need to keep in mind is that with invoice factoring, you sell the balance of your invoices, and the factoring company takes responsibility for collection—this is known as an asset sales arrangement. If the customer doesn’t pay the invoice, the factoring company absorbs the loss. The reason this distinction is especially important: It costs you more.

Since the factoring company is purchasing your outstanding invoices and taking on the risk of your customer not paying, they’ll charge larger fees. On the flip side, one benefit to factoring: you don’t have to manage the unpaid invoices or track down payments from customers. The factoring company will handle all of that.

Sometimes, financing companies blur the lines between accounts receivable financing and invoice factoring, so just make sure you understand the terms and conditions of the lender you’re working with.

Frequently Asked Questions

The Bottom Line

If you’re facing an unsteady cash flow or have heightened cash needs due to seasonal changes or business growth, accounts receivable financing might just be what takes your business from good to great. Instead of waiting 30, 60, or even 90 days for customers to pay you, you can leverage your unpaid invoices for fast access to capital.

Whether you decide on accounts receivable financing or another type of business loan, make sure you find the right lender for your business and to consider all of your financing options.

Vice President and Founding Editor at Fundera

Meredith Wood

Meredith Wood is the founding editor of the Fundera Ledger and a vice president at Fundera. She launched the Fundera Ledger in 2014 and has specialized in financial advice for small business owners for almost a decade. Meredith is frequently sought out for her expertise in small business lending. She is a monthly columnist for AllBusiness, and her advice has appeared in the SBA, SCORE, Yahoo, Amex OPEN Forum, Fox Business, American Banker, Small Business Trends, MyCorporation, Small Biz Daily, StartupNation, and more. Email: meredith@fundera.com.
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