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What is Accounts Receivable (AR) Financing?

With accounts receivable financing, you can receive early payment on your outstanding invoices. The accounts receivable company provides you with the capital against your outstanding invoices at a fee.

Technically, accounts receivable financing is not a small business loan, but they share some features. The primary difference between the two is, in account receivable financing as long as the customer is clearing out the unpaid invoices you don’t have to pay the lender, on the other hand when borrowing small business loans you are obligated to make the payments on time. When your small business needs a fast infusion of capital, accounts receivable financing can help.

How Accounts Receivable Financing Works?

It allows businesses to receive capital while waiting for their invoices to get paid. After you invoice your customer, you provide the funder with an invoice copy along with supporting documentation. The funder will advance you up to 80% of the eligible invoice to you. This is how it works at Merchant Advisors. Our loan specialist follows up to make sure your customer pays according to your invoice terms. After receiving your customer payment, we’ll release the remaining 20% to you, after deducting our administrative fee.

Our automated accounts receivable financing process allows you to focus on your business, with shorter payment turnaround time, better cash flow and lower interest expense for your business - allowing you to keep payments current, informed on impaired goods, lost shipments, or disputed invoices.

The Difference between Accounts Receivable Financing and Invoice Factoring

The terms ‘invoice factoring’ and ‘accounts receivable financing’ are often used interchangeably. However, they are two different business funding products with a few small but fundamental differences. The main difference is that accounts receivable funders advance, and Invoice factors buy.

Accounts Receivable Financing

In accounts receivable financing, the lending company offers advance by accepting invoices as collateral. The funder advances up to 80% to 90% of the funds based on your invoices, and you are responsible for the relationship between you and your customers. You have to remind your customers to pay back, persistently. Once the lender has received your payment, then he will deduct the fee and the amount left from your standing balance. If your customers are outstanding and somehow they have managed to clear out pending invoices before time, you can pay off the debt earlier.

Invoice Factoring

In invoice factoring, the factor purchases invoice at a discounted rate and accept the responsibility of collecting payments from your customers. If a customer fails to make the payment on time, lenders will face the consequences. The benefit of AR factoring is that you don’t have to follow up with the customers to make the payment on time. Since there’s an immense risk involved, the charges are slightly higher as compared to receivable financing.

How Much Does Accounts Receivable Financing Cost?

The cost of accounts receivables financing depends upon three things:

• The time your customers take to pay
• The lender’s fees
• The quoted factor rate

Here is an accounts receivable financing example to help you understand the cost structure

Accounts Receivable Financing Example

Allan’s Retail Shop receives an 80% advance for an invoice totaling $50,000. The invoice amount is $50,000 with an advance amount of $40,000 and the reserve amount is $10,000

The accounts receivable funder charges a weekly factor fee of 1.02% until the invoice is paid in full. The factoring fee per week is $510

Allan’s customer takes a total of 9 weeks to repay the invoice. The cost of Financing is $4,590 and the rebate owed to Allan’s Retail Shop is $5,410