What is Accounts Receivable Financing?
Accounts receivable financing is a form of funding that leverages the accounts receivables to raise capital for company needs such as operating capital, inventory, expansion, and emergency cash flow infusions.
How does Accounts Receivable Financing Work?
Accounts receivables financing agreements can be structured in multiple ways but usually with the basis of either an asset sale or of those receivables in the form of a small business loan or advance. The most common types of funding products for financing accounts receivable are Invoice Financing (Factoring), Asset-Based Business Loans (ABL), or Future receivables sale and purchase agreements.
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4 Best Accounts Receivable Financing Options
1. Invoice Factoring for Accounts Receivable Financing
This type of accounts receivable financing allows you to get an advance of invoices sent to clients/customers of up to 95% percent outstanding invoices value. When your customer pays on their terms, the remaining balance of the invoice is paid to you, minus a small fee business's outstanding invoices. An Invoice finance company will advance a set amount of the unpaid invoices based on an invoice advance financing agreement and then collect directly from the client or customer for the unpaid portion. Unpaid invoices can be a huge burden on overall success — but we offer access to accounts receivable factoring that can help you leverage outstanding invoices to achieve your goals.
Invoice Financing: Product Overview
- Rates: Factor Rate of 1.50% to 2.75% of invoice amount advanced
- Fees: Typically a monthly service management fee based on volumes
- Credit Standards: Companies that are invoiced will be credit vetted, not the business engaged in the invoice advance agreement.
- Documentation: Low Documentation: 1-page application, accounts receivable aging report, and clients contact information
Benefits and Best Uses of Invoice Financing
Invoice factoring once set up with the invoice finance company and receivable financing accounts, can provide funds in a pinch and allow a company to continue to operate smoothly and pay business expenses. In many cases, factoring companies now have web-based portals that allow business owners to upload invoices in real-time and accounts receivable financing accounts to get advances deposited in a business bank account. The costs are relatively low compared to the benefits. It’s is a small business lifeline. The main use of invoice advances is for operating capital, and to accelerate accounts receivables invoice value, but there are no restrictions on the use of funds.
2. Asset-Based Lending (ABL)
Commonly referred to as asset-based loans (ABL), asset-based finance is a form of business lending that relies on the collateral of your company, rather than just finances and business credit. Traditional options look at revenue, financials, and other indicators first, and collateral second, while asset-based loan programs look at collateral first and revenue second. This method relies on collateral (receivables) to provide financing options, which allows companies that are growing fast to maintain the finances needed to keep up with the growth. While ABL is great for high-growth companies with outstanding receivables from their clients, any company that is in distress and needs to recapitalize its balance sheet can utilize asset-based lending.
What Type of Collateral Is Used for Asset-Based Lending?
Asset-backed loans enable companies to utilize a variety of collateral options for security. There is a long list of assets that can be used, but for the purposes of this topic, we are going to focus on the example of accounts receivables like purchase orders and invoices. But make no mistake about it, this will collateralize all business assets if you get an asset-backed business loan.
What Are Asset-Based Lending Rates?
There are a variety of different asset-based lending companies, all of which have different structures, criteria, customer bases, and financing rates. Rates for an asset-based loan can range from 5.25% to 15% and can be structured as an asset-backed line or an asset-based term loan. Below is a list of factors regarding your assets and such that can affect your rate.
Asset-Based Financing: Product Overview
- Rates: Interest rates start at 0% and up to 28.99%
- Terms: No term limits, Revolving business Line of Credit
- Fees: No Origination Fees
- Payments: Low flexible monthly payments
- Credit Standards: Good to excellent with deep history
- Documentation: Accounts receivable ledger, outstanding invoices. Easy Application (larger number of requests may require more documentation)
3. Merchant Cash Advance
Merchant Cash Advances, also known as Purchase of Future Sales Agreements, advance a “lump sum” of money upfront to a business owner with a discounted purchase price (also known as a specified amount) to pay back. Unlike accounts receivables, an MCA utilizes incoming daily sales. The advance is repaid by taking a fixed percentage of future card sales batches until the payback amount is paid back in full, there is no term limit with advances as the fixed back percentage never changes.
The time frame to pay back depends on the volume of future card sales. It’s estimated that Merchant Cash Advances are set up with expectations of being repaid in 6 to 18 months, but again it may be longer or shorter depending on future card sales. The only documentation required for funding is a simple application process, three months of bank statements, and three months of merchant processing statements. No other financial statements are required.
Merchant Cash Advance: Product Overview
- Rates: Factor Rates between 1.15% to 1.45%
- Terms: No term limits estimated payback periods are 6 to 18 months
- Fees: Typically 1% to 3% Origination Fees
- Payments: Fixed percentage Splits from future card batches
- Credit Standards: All types considered from Poor to Excellent
- Documentation: Reduced, low Doc. 1-page application, 3 months bank statements, and 3 months merchant processing statements.
4. Business Cash Advance
Business Cash Advance, also known as a Purchase of Future Sales Agreements, advance a fixed “lump sum” of money with a discounted purchase price, also known as a specified amount, to payback. The advance is repaid by taking a fixed percentage of future overall sales, which is different than an MCA, which takes a percentage of future card sales. Payments are collected by a fixed daily or weekly payment deducted from a business bank account, which is based on the fixed percentage of future sales.
After every month, if the fixed payments taken are more than the set future percentage of sales, then a refund back to the merchant can occur. This repayment continues until the payback amount is paid back in full. Therefore, there is no term limit with advances as the fixed payback percentage ever changes. The time frame to pay back depends on the volumes of future overall sales. It’s estimated that Business Cash Advances are set up with expectations of being repaid in 6 to 18 months, but again, it may be longer or shorter depending on future card sales cash flow. Documentation is limited to quick application and three months bank statements. No tax return is required.
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Pros and Cons of Accounts Receivable Financing
All of the accounts receivable financing products mentioned provide funding to small businesses with some type of reduced documentation. The benefits of these accounts receivable financing products allow small business owners who either can’t or won’t provide certain documentation the ability to still get approved for funding.
Unfortunately, for those small businesses that don’t invoice customers for payment on a regular basis, accounts receivable financing is not for you, and you will need to look at other options.
Pros
- Reduced documentation provided for a decision
- Speed-Processing times
- When you are turndown for financial statements. Receivable loans offer a solution.
- A factoring company thinks outside of the box to fund deals.
Cons
- Accounts receivable financing rates may be higher than traditional options
- Fees may cost more than traditional options
- Terms may be shorter in duration
- May not offer as much flexibility
- Loan Amounts may be limited
Accounts Receivable Financing Companies
An account receivable financing company will sign an agreement with you before moving forward with your application. You must read the agreement carefully to understand the terms of lending. While some accounts receivable companies might now accept your application if you have bad credit, some might accept it at higher rates. The following is a list of companies that provide accounts receivable financing:
- Alternative Lenders
- Banks
- Credit Unions
- Factoring Company
- Business Financing Company
