Accounts Receivable Financing Buyer’s Guide

If you are like most small business owners, securing financing often involves emotions ranging from uncertainty to frustration as you navigate the alternatives. In addition to your daily job responsibilities, the demands of evaluating borrowing options can be stressful and overwhelming. This straightforward buyer’s guide serves as a starting point to help you with the decision making process around choosing an accounts receivable financing partner.

What is Accounts Receivable Financing?

A/R financing allows a business to receive cash in advance of the payments due from its customers on open invoices. Rather than waiting 30, 60 or 90 days to be paid, the business can present open A/R to its financing partner and receive money within hours. By utilizing Accounts Receivable financing, businesses can accelerate their cash flow helping them make payroll, purchase new inventory, take on new contracts, and generally grow more sustainably.

Accounts Receivable financing is a term that is often used interchangeably with invoice discounting, factoring, and even asset based lending in some instances. With each lender using different terminology and different practices, selecting an A/R financing provider can be confusing. This guide will help you ask the right questions and select the best A/R financing solution for your business.

If you’re interested in learning more about the different types of lenders take a look at Exploring Your Options for Business Financing.

12 Questions to Ask an A/R Financing Partner

  1. How is my credit line established?

    Desired Answer: In A/R financing, your credit limit should be based on the credit strength of your customer and your business’s projected revenue.
    Red Flags: Traditional underwriting criteria like operating history, profitability, ratios, etc. don’t allow your business to benefit from the flexibility of A/R financing.

  2. Where do you get your funds?

    Desired Answer: The financier has a direct source of funds and lends those funds to you (banks or established financiers lending their funds to you).
    Red Flags: The financier borrows money making them a middleman. Whether they’re borrowing from a bank or private investors these costs are passed on to you. Even worse, the availability of these funds is not guaranteed.

  3. How quickly is my funding available?

    Desired Answer: A best in class A/R financing provider will ensure funds are in your account 12 – 24 hours after you’ve financed your receivables.
    Red Flags: Two to three days. If you’re funding with an independent financing company as opposed to a bank, these funds can take longer to clear. Don’t forget, any wire fees will be passed on to you, so ask about ACH fund transmission.

  4. How quickly are payments from my customers applied to my balance?

    Desired Answer: Immediately upon receipt.
    Red Flags: Any clearance days cost you time and money. Again, funding with a bank or with a provider that has a close relationship with a bank reduces holding periods and interest.

  5. What are all the fees associated with your financing?

    Desired Answer: Interest and/or discount fees only. The more straightforward the pricing structure, the more predictable the financing costs and cash flows.
    Red Flags: Any additional transaction fees, ACH fees, lockbox fees, service fees should be red flags. Origination fees and termination fees can sometimes be negotiated.

  6. What’s the term on your typical contract?

    Desired Answer: One year or less. If the financier requires a two-year commitment, keep looking.
    Red Flags: Two years or more. Flexibility is the name of the game. Don’t lock yourself in needlessly.

  7. How long has the financing company been in business?

    Desired Answer: While the length of time a financing company has been in business is not always a barometer for quality, it’s important to find a financier that has a proven and stable operating history.
    Red Flags: Start Ups. There are few barriers to entry for accounts receivable financing providers which unfortunately means a number of under-qualified partners. You don’t want your financing partner to go out of business and put you out of business in the process.

  8. What are your funding or lending limits?

    Desired Answer: Whether it’s one hundred thousand dollars or one hundred million dollars, all financing companies have a limit. If your company grows past that limit, there is likely a contingency plan, but at this point you simply want the financing company to be open and honest with you.
    Red Flags: “We don’t have a limit. We can do it all.” This is simply untrue. Everyone has a limit and you should push on sales people that try and state otherwise

  9. What are your funding limits for each company’s customer?

    Desired Answer: Similar to the answer above, you want your funding provider to outline how credit limits are established for your business’s clients.
    Red Flags: Ambiguity. Are they unclear? Is there no process in place? If so, ask to speak with their underwriter or the person making credit decisions.

  10. How will you interact with my customers?

    Desired Answer: In A/R financing relationships, there is interaction between the financier and the company’s customer at some level. Clarity, justification, and confidence in a funding provider’s process is crucial.
    Red Flags: Heavy handed responses and unclear responses are equally troublesome. If the financier is avoiding the question or claims there is no interaction, watch out. Similarly, good financiers understand it’s a partnership and not an adversarial relationship.

  11. Is any part of your operations outsourced to third parties?

    Desired Answer: No. Everything from sales, to credit, to accounts receivable management is in house.
    Red Flags: Yes. Some funding providers, may utilize lending “platforms” that are really a third party servicer (i.e. BusinessManager). Ideally, most companies prefer to work with full-service shops rather than those that may outsource crucial practices and processes.

  12. What reporting will I have access to?

    Desired Answer: Direct access to your account statements and open invoices via an online platform is a must.
    Red Flags: Reports are provided on demand and as needed. This leaves the financing party in a position of power and more often than not leaves customers in the dark.


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