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What Is Accounts Receivable Financing?

Accounts receivable financing provides funds in exchange for your future invoice payments. If your business is waiting on unpaid invoices, or has a generally long payment cycle, AR Financing can allow instant access to the cash that’s tied up in that process.

With AR Financing, unpaid debts could fund just about any aspect of your business, from simply maintaining liquidity to paying for capital investments and expansion. And approval times are far faster than a traditional small business loan.

If unpaid invoices are holding you back, this might be a solution. Let’s get to know the process, so you have a full understanding of how AR financing works.

Advantages

  • Easy qualifications for the borrower
  • Provides much-needed working capital
  • Rates are dependent on customer

Disadvantages

  • Clients could disqualify you
  • Invoices act as collateral
  • Recurring weekly fees

Advance Amount

Up to 80% of receivables

Estimated Repayment Term

Until receivables are paid by the customer

Factor Rate

Starting at 1.02

Speed of Funding

As fast as same day

How Does Accounts Receivable Financing Work?

 

Invoice Selection

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.

 

Lender Deposits Capital

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.

 

Weekly Fees

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.

 

Example of Payments

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.

How Do I Qualify for Accounts Receivable Financing?

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

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).

 

Larger Companies

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.

 

Smaller Invoices

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:

Accounts Receivable Loan Qualifications

  • Time In Business: 1+ Years


  • Annual Revenue: $150,000+


  • Credit Score: 600+

How Do I Apply for Accounts Receivable Financing?

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.

Here is a list of some additional documents, along with your outstanding invoices, you may be asked to provide for accounts receivable financing:

 

Some documents you may need are:

  • Outstanding Invoices

  • Balance Sheet

  • Recent Bank Statements

  • Voided Business Check

  • Income Statements

How Can My Business Use 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:

Slow Season

When your outstanding invoices are left unpaid, receiving payment is a top priority as your seasonal lull approaches. Maintaining sufficient working capital is crucial to sustaining your business. Accounts receivable financing can keep you above water while you wait for your clients to pay.

Growth Opportunities

Sometimes opportunities to take your business to the next level come when you don’t have enough working capital to act on them. Accounts receivable financing will provide you with the money you need to stay focused on your business’s opportunities for growth.

Emergency Situations

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 emergency expenses that come your way.

Peace of Mind

When you have a large amount of capital tied up in outstanding invoices, it’s understandably unsettling. With accounts receivable financing, you can unlock that capital now, before you’re pressed for time (and for cash).

What Does Accounts Receivable Financing Cost?

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:

 

Amount

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.

 

Client Reliability

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.

 

Age of the Invoice

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.

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