Accounts Receivable Funding
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Accounts receivable financing are funds provided to replenish your working capital in exchange for your future invoice payments. Accounts receivable financing will allow you to maintain your financial responsibilities while you have capital stuck as an unpaid debt.
Accounts receivable financing, also known as AR financing, can provide the instant access your business needs, unlike the lengthy process that comes with a traditional small business loan.
While this option could be the solution to your financial concerns, let’s get to know the process so you can have a full understanding of how AR financing works.
Easy qualifications for the borrower
Provides much-needed working capital
Rates are dependent on customer
Clients could disqualify you
Invoices act as collateral
Recurring weekly fees
Before applying for AR financing, you will need to choose which invoices you would like to finance. Be sure to include the receivables most valuable to lenders which can increase your chances for financing approval. These include newer invoices, smaller invoices, and those unpaid by larger companies.
Once you submit your application, including your selected invoices and other required documents, your lender will review everything to determine the amount of your financing program. Be aware that the amount your lender initially deposits is usually 80-90% of the total amount you’re approved for.
The cost of your AR financing relies on when your client pays their outstanding invoice balances. Each week your client neglects to pay, your lender will add a fee of around 1% to your account. Once your client fulfills the outstanding balances, you can pay off your AR financing program, including your lender’s fees.
Rather than making recurring monthly payments, AR financing is satisfied with a one-time payment. To better understand the AR financing payment process, let’s break this down with an example:
In this scenario, if you were to finance $10,000 worth of outstanding invoices, and your lender added a standard 3% processing fee, your balance would be $10,300.$10,0000 + $300 = $10,300
Your lender would then initially deposit $8,500 into your account (85%). Once your client has fulfilled their $10,000 balance, you could take their payment and put it towards your AR financing principal.$10,300 - $10,000 = $300
If it took your client 4 weeks to pay their balance, your lender will have added $412 in weekly fees to your agreement.$300 + $412 = $712
Your lender will then subtract the total amount of fees ($712) from the original withheld amount ($1,500).$1,500 - $712 = $788
Your lender will then deposit the remaining capital ($788) into your account. In the end, your client fulfills the principal of the program while you are only responsible for the fees your lender adds along the way.
Receivable financing companies determine your eligibility through the characteristics of your invoices and your clients’ ability to pay rather than your business financials. Let’s cover the types of invoices lenders typically want to finance:
Newer invoices are seen as more valuable since the possibility of payment is much more likely compared to older invoices. You can increase your chances of qualifying for accounts receivable financing if your invoices have only recently gone past due (between 30-90 days).
Lenders find invoices more valuable if a larger business with a significant annual revenue is responsible for payment. On the other hand, if your client lacks working capital, you may not qualify due to the risk that comes with your invoice.
Small invoices are less of a gamble to lenders. The less money your client owes, the more likely it is that they will pay. Here is a list of some other guidelines that play a role in qualifying for receivable finance programs:
Applying for accounts receivable financing can be accomplished with an online business funder. When submitting your online application, be sure to include the invoices you wish to finance, along with the other documents in the box to the right. The online application takes only minutes to complete and asks for simple business details and contact information.
Fast Capital 360 can guide you through your selection process. We are here to help you review your invoices and determine which are best to include in your accounts receivable application.
Below is a list of some additional documents, along with your outstanding invoices, you may be asked to provide for accounts receivable financing:
Accounts receivable financing helps you tackle the cost of running your business when you are waiting for outstanding payments. Let’s review some of the reasons why your business may need to use accounts receivable financing:
When your outstanding invoices are left unpaid, receiving payment is a top priority as your seasonal lull approaches. Maintaining a sufficient working capital is crucial to sustaining your business. Accounts receivable financing can keep you above water while you wait for your client to fulfill their balance.
Sometimes opportunities to take your business to the next level come when you don’t have enough working capital to capitalize. Accounts receivable financing will provide the capital you need to help keep you from worrying about your outstanding invoices and focused on an opportunity to grow.
In the world of business, you need to expect the unexpected. Emergencies happen and when they do, they can cause a significant gap in your cash flow, especially when you have a number of outstanding invoices. AR financing fills that gap, allowing you to handle any emergency expenses that come your way.
When you have a large number of outstanding invoices waiting on payment, it can make you feel very unsettled. In these scenarios, business owners like you wish they had the additional working capital to see them through these uncertain times. Accounts receivable financing can finance your current outstanding invoices, now, before you are pressed for time.
The cost of your accounts receivable financing is based on a variety of factors. Let’s take a look at some of the details your lender will analyze when determining your accounts receivable financing rate:
Larger invoices are riskier for lenders because they will take more time and capital to pay back.
Leaving out larger, unnecessary invoices will simplify your path to obtaining accounts receivable financing.
Lenders will look into specific factors, like your client’s financial history and credit score. If you have a client with a poor payment history, your rate could increase due to the risk involved.
Older invoices carry a higher rate because there is a greater risk they will become lost income. For invoices more than 90 days past due, you may want to send them to a collection agency rather than including them in your accounts receivable financing application.