Account Receivable financing

How Account Receivable Financing Can Boost Your Business


When you’re running a business, most business owners will tell you that financial health is the most important issue to consider. Keeping your business financially healthy is necessary for success.

However, sometimes, a business can have cash flow issues, which may impact overall financial health. If this sounds like something you’re having an issue with, you may want to consider accounts receivable financing. Accounts receivable financing companies can help you solve your cash flow problem before it becomes overwhelming. Find out how below!

What Is Accounts Receivable Financing?

Accounts receivable financing is a financial agreement. In this agreement, a business receives capital principal in relation to the company’s accounts receivable. It is also known as accounts receivable loans, invoice financing, or factoring.

Generally, the accounts receivable loan given by the lender to the company is based on only a portion of its accounts receivable. Accounts receivable are unpaid invoices. Because the company expects to make money from the outstanding invoices, they are considered an asset, which means that they carry value.

Can Be Structured as A Line of Credit

These agreements can be structured in a number of ways, but it is normally structured as an asset sale or a loan agreement. From time to time, the structure may be arranged as a line of credit that the business can use.

So, to put it simply, accounts receivable financing works by leveraging outstanding receivables as an asset. The AR financing companies pay businesses for the money that they are likely going to make off of accounts, then invoice customers on behalf of the original business.

What Are The Types of Accounts Receivable Financing?

Generally speaking, there are three types of accounts receivable financing that companies can take part in. Each of these is explained in detail below.

Account Receivable financing

Traditional Factoring Company

A traditional factoring company is probably the most common type of accounts receivable financing available to a company. Factoring companies will pay a business approximately 80% of the worth of unpaid invoices upfront. The factoring company then takes ownership of those accounts and begins to attempt to collect payments on the accounts.

When the customer pays on these accounts, the accounts receivable factoring company provides the remaining balance to the selling company, minus any factoring fees. That is how factoring companies make their money. In a sense, an invoice factoring company is similar to a collection agency, as they engage in the typical collection process.

Select Receivable Financing

Select receivable financing companies operate in a similar manner to factoring companies. The main difference is that the company is allowed to choose which receivables to submit for financing. This means that a company sells only the accounts they want the lender to collect on.

Another difference in the way that these companies work has to do with payment. Companies are paid the full amount for the receivable amount in select receivable financing.

Financing rates with these companies tend to be lower, meaning that a business receives more in exchange for its accounts receivables. Additionally, accounts submitted do not show up on a company’s balance sheet as debt, which prevents them from impacting the company’s debt ratio.

Asset-Based Lending

Asset-based lending is the least flexible version of accounts receivable financing. In this version, the accounts receivable financing company receives most of a business’s receivables. The business has very little choice in what’s given to the lender. Subsequently, the lender charges higher fees, as well, since they are absorbing more risk than in other instances.

While this is the most expensive option for business owners looking for financing, it is still a way for the accounts receivable company to generate quick cash flow.

What Can Accounts Receivable Financing Be Used For?

Accounts receivable financing can be used by business owners in a number of different ways. Most notably, companies use it to improve cash flow quickly. However, there are a few other benefits to AR financing for businesses.

It Makes it Easier for Small Business Owners to Secure Capital

Small businesses can benefit greatly from accounts receivable financing. Often, they lack the necessary resources to obtain traditional bank loans. This is a way for them to circumvent the traditional lenders and get the money they need. A small business owner doesn’t always have numerous financing options, so this is a great way to secure cash immediately.

accounts receivable financing

Business Expenses Can Be Kept Lower

One of the biggest expenses for a business is employing a substantial workforce. When you utilize AR financing, you don’t have to hire additional employees for collecting payments. Instead, the financing company does that for you.

Advantages and Disadvantages of AR Financing?

There are a number of advantages and disadvantages that should be taken into account when it comes to AR financing. In reality, the way accounts receivable financing works can be considered a double-edged sword. Still, it’s more positive than it is negative. Take a look at the below factors.

Advantage: Accounts Receivable Gets You Cash Fast

If your business needs access to working capital, accounts receivable financing is the quickest way to go about securing some. This is a huge advantage for companies that don’t have cash reserves but need money quickly. Not having to rely on slow paying customers is a significant advantage that AR financing carries. It’s also much faster than an SBA loan or a regular bank loan.

Advantage: Accounts Receivables Financing Carries No Debt

Financial statements are at the core of a company’s financial health. When a business uses an AR financing company as a financial intermediary, the money provided doesn’t show up as debt on the company’s balance sheet. This is a huge advantage in terms of business growth. When a company isn’t carrying debt, they appear to be more successful. This is a huge strength of AR financing.

Disadvantage: You Don't Receive the Full Amount of Money Owed

While a business can make account receivable financing work for them, it comes at a cost. When a business submits accounts for AR financing, they aren’t going to receive the full amount of money owed to the account. Just like any other financing company, the financing agreement with AR financing comes with “interest expense”. In this case, though, it’s called a factoring fee, or a collection fee.

Disadvantage: A Business's Financials Appear Inflated

When a business enters an agreement with a financing company, there’s a chance that the invoice may not be paid by the customer. If this happens, then the accounts end up being returned to the business. When this happens, it appears as bad debt on the company’s financials. So, while a company may appear to be doing well, that could change depending on the result of the AR financing.

factoring company

Requirement for Accounts Receivable Financing

It’s been touched on how easy it is to apply for accounts receivable financing. That’s because these companies don’t look at the traditional financial qualifications that a bank would. Instead of reviewing your credit history, they want to look at the accounts you’re offering. If you’re considering applying for accounts receivable financing, these are the requirements you’ll need to meet:

  • Be a company that invoices its customers, preferably in business to business or business to government operations.

  • The business needs to have been in operation for at least six months, though the longer the better.

  • Make at least $50,000 in annual business revenue, though more is better, again.

  • Have outstanding receivables for the company to collect on. Specific companies will require specific accounts.

  • Be able to prove that your customers are creditworthy (they want to make sure that a customer pays the invoice).

In addition to the above requirements, you'll be required to provide a few documents, as well.

  • Copies of your business’s outstanding invoices.

  • A valid driver’s license (this mostly applies to small businesses).

  • A voided check linked to your business bank account.

  • Bank statements from your business bank account.

As you can see, the requirements are much looser than if you were to apply for a traditional bank loan.

Where Can I Apply for AR Financing?

There are a plethora of accounts receivable financing companies available to meet nearly every business need. Many specialize in serving different areas of business, but the majority of business owners should be able to find one that matches their needs. Apply to any of the following, depending on what you’re looking for.

Upwise Capital allows users to compare different financing companies to find the best accounts receivables financing agreement.

No matter what background your business has, as long as you have invoices, you can take advantage of AR financing. It is easily the best way to secure funding when you need it without the hassle of taking out a loan!

Our team at Upwise Capital is here to assist you with every step of the way to secure whatever funding is needed to help your business grow. If you have any questions regarding how AR financing works, please call our team at 77-55-UPWISE or email [email protected].  You can also apply online for AR financing, so you can get back to work and running your business.

So…What do you think? 

We want to hear from you.  What do you think of this article and was it helpful in your search for AR financing? 

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