Accounts Receivable Financing takes outstanding customer’s invoices as collateral, and as a result, you get working capital to carry out daily tasks of your business.
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 a small business loan you are obligated to make the payments on time.
So, if your business needs a fast infusion of capital, receive early payment of unpaid invoices by the lender using accounts receivable financing.
Types of Accounts Receivable Financing
The needs and requirements of business vary according to its functionality and structure, so Merchant Advisors offers three types of financings:
Asset-based lending also called a business line of credit or commercial finance secured by a collateral or balance sheet asset and carries significant fees. Asset-based lending provides businesses with more credit availability and flexibility to achieve their goals by freeing the capital stuck due to outstanding invoices.
Traditional factoring, also called non-recourse factoring, provides continued protection to businesses from the credit risk of their account debtors. In this arrangement, the initial payment received is less than the full amount of the receivable. It allows businesses to choose which receivables to trade but carries high fees with smaller credit lines.
It is a new form of receivables finance which allows businesses to choose which invoices they would like to advance and when they would like to fund them for early payment. This type of finance has lower rates and does not influence debt ratios or other unpaid credit lines.
How does Account Receivable (AR) Financing works?
Unpaid invoices lead to inconsistent cash flow; the ultimate goal of AR financing is to streamline the cash flow so you can invest in future projects, give the business an upgrade, invest in the training of your employees and pay your people on time.
In most cases, lenders will not send a ‘repayment’ reminder to customers. If a customer fails to come through, the borrower will face the consequences and compensate in the form of debt. Usually, AR financing has lower rates as compared to factoring.
How to qualify for Accounts Receivable Financing?
Constant nagging about a remarkable financial standing – a fair credit score, the lender will look at the timeline, and the amount of the unpaid invoices to make a final decision.
The quality of invoices holds significant importance because the lender will calculate the interest rate accordingly and will get a rough idea regarding the clearing out of the invoices on the customer’s behalf. So, to get benefit from this stellar offer look at the eligibility criteria.
The list is short:
• You must be running a business for at least six months.
• If your business is generating $50,000+ annual revenue, you stand a chance.
AR financing will not work unless you have unpaid invoices and reliable customers.
Merchant Advisors will do everything in power to help its clients, but consistent payment history on customer’s behalf increases the chances of approval.
AR financing/factoring is a simple process; lenders don’t have a long list of required documents.
So, when filling out an application online make sure you the below-mentioned documents by your side:
• Outstanding receivable/Unpaid invoices
• Driver’s License
• Driver’s License
Lenders are aware of the hardships one has to go through to manage accounts, so most alternative lenders have collaborated with the online accounting software. The goal is to save time and to provide the best care.
Apply for Accounts Receivable Financing to propel your business in the right direction.
When to use Accounts Receivable Financing?
“It takes money to make money.” To fund your business growth, you need cash, and AR financing is one way to go about it.
Financing receivables companies approve accounts in as little as 24 hours, and you will get the funding on the same day. Financing your unpaid invoices can get you cash when you have a cash crunch. Every small business owner faces the same problem, the problem of customers not paying on time and with opportunities provided by AR financing your business will grow in the manner it deserves.
Furthermore, with financing, a business can get funds even with bad credit or when you don’t qualify for a bank loan. It is based on your customers’ credit – not on your credit or business history.
AR financing will be your way out of any financial trouble. If your business is unable to meet the required cash flow and you have failed to meet the seasonal demands, then this is the right option for your business. Pay the bills and salaries on time, carry out business expansions, or remodel your company with ease.
You can cover your financial needs with AR financing. If you tackle mega contracts, payments on the customer’s behalf are integral to your business growth. Even sometimes, the customer is reluctant to pay on time. Apply for financing and don’t let delay hinder business growth.
How to apply for AR Financing?
AR financing is the fastest way of financing with approval in 24 hours. The funds are accessible in your business account once the lender approves your loan. The approval time will vary according to the nature of your invoices, if the source is reliable then there is nothing to worry about. Comparatively, invoice financing from the government or corporate sectors are more time-consuming.
Make a folder of the required documents and contact your lender in advance, so you know what’s needed.
You only get to choose your receivables once, send the ones with a credible history of making the repayments on time. Most lenders have an online platform where you can evaluate the status of your invoices.
Submit the application carefully, keeping the format in mind. Once your application is approved, the lender will lend you an advance of 80 - 90 %, according to outstanding invoices.
Positive and Negatives of AR financing
Sometimes the financial needs of businesses are not met through different types of loans, so AR financing comes in handy. Most owners don’t qualify because of poor financial standings, but this type of financing doesn’t rely on it. Make sure you correctly evaluate your business needs and see if AR financing provides the fix your business needs.
As your customer's credibility weighs a lot in AR financing so if your customers have a reliable financial history, then the chances of loan approval are remarkable. So a lot is relying on the credibility of your customers.
• Easy and simple application and approval process.
• You don’t have to go through the application process again and again.
• Don’t have to provide separate collateral because invoices act like one.
• Application approval and the final interest rate are based on the credit of the customers.
• The borrower is responsible if the lender doesn’t clear the invoice on time.
• AR financing is more expensive than traditional and other alternative lending financing options.
• Your chances of approval and rates depend on the quality of the customer’s invoices.
Primary differences between Financing and Factoring
Both of the funding options allow you to get funding from the lenders in exchange for the invoices, but a slight difference still exists!
Here, your potential financing company will give you 80% to 90% of the funds based on your invoices, and you are responsible for the relationship between you and your customers. You are the one who has 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.
Its main feature: sell invoices to a lender, make him collect the payments from customers. If the customer fails to make the payment on time, lenders will face the consequences.
The upside 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 the rest of the financing options.
How to work effectively with a Factoring Company?
Before lenders make a final decision, they evaluate clients on parameters. To get quick access to cash without incurring penalties, keep the below-mentioned points in mind:
- For starters, if you are sure customers won’t pay, don’t factor invoices. In the case of a recourse factor (AR financing), you pay off all the invoices and fees eventually.
- It is recommended to inform the lenders beforehand if your customers are backing out of payment. It strengthens your relationship with potential lenders, and they will be more likely to work with you.
- Lastly, keep your eyes open! Most lenders will warn you when there’s an issue – late payment, or when they’re unable to fund you due to a bank issue.
What makes Accounts Receivable Financing a Better alternative?
- Less paperwork, less time consumption.
- Get cash in your bank account within 24 hours.
- It welcomes Bad Credit Scorers.
- Approval is based on invoice quality, not on your company’s current financial standing.
- It is based on customers’ credit quality, and not on your credit or business history.
- Since it’s not a loan, you do not incur debt.
- It gives you an opportunity to improve your credit score.
- It offers free back-office support, including managing collections from your customers.
- It provides customized funding option when you need necessary capital.
Accounts Receivable Financing – Funds for every business
From the construction business to freelancers AR financing has something to offer to every kind of business.
Even if you are in the business of construction or run an IT business, AR Financing/Factoring will come in handy. Every business is unique with its pace and working capital requirements. Our experienced financial advisors will work with you to analyze business needs and suggest customized accounts receivable financing solutions.
So, give a financial push to your business and change the entire fate of your business. You can use the funds to cover up seasonal highs and lows or expand your business. Make a wise pick!