What Is Accounts Receivable Financing?
Providing customers a greater degree of flexibility and cash availability when compared to a traditional line of credit.
For many businesses, accounts receivable represent a large component of the balance sheet. As more buyers require suppliers to accept longer payment terms, A/R balances are growing at the expense of the supplier’s cash conversion.
In order to improve liquidity, many businesses are turning to accounts receivable financing to unlock the value in their outstanding invoices. A/R financing companies provide businesses upfront cash availability against open invoices. As invoices are created and billed to customers, the business simultaneously presents these invoices to their financier.
Accounts receivable financing, also called accounts receivable factoring, is the process of financing outstanding invoices in order to access the cash value sooner. Many businesses have slow-paying customers and long payment terms, anywhere from 30-90 days, resulting in cash flow problems. While those invoices are considered an asset on their balance sheet, the invoices are not a liquid source of capital until they’re paid.
Accounts receivable financing companies, also called a factoring companies, provides financing related to a portion of the face value of a business’s outstanding invoices.
The accounts receivable financing provider will perform due diligence on you and your customers, completing background and credit checks and verifying invoices which determines if they are legitimate and likely to be paid. Depending on their evaluation the provider will then approve your invoices for financing.
Once approved for accounts receivable financing, you are free to submit invoices for funding pretty much immediately. The provider will finance anywhere from 70-90% of the invoice face value, holding the remainder in a lockbox until your customer pays their bill. Once paid, the provider will release the remainder back to your business, minus a factoring fee – typically 1-5% depending on your contract terms.
To make it easier to understand, we’ve outlined the steps below.
AR-based lines can be priced in a variety of ways. The flexibility in structure can benefit both the business and the Accounts Receivable Finance company by allowing for maximum flexibility in developing a solution that benefits each party. Unfortunately, this same flexibility in pricing can make it difficult for business owners to grasp all-in costs and can make pricing comparisons amongst lenders seemingly impossible.
In addition to an interest component, accounts receivable financing companies may utilize lockbox fees, service fees, processing fees, monitoring fees, transaction fees, unused line fees, and other ancillary charges in order to achieve their desired return.
Wading through all this noise and determining an all-in rate can be painful, but keep in mind the primary drivers in your Accounts Receivable Financing costs include the size of your financing needs and the credit quality of your customer base.
Like any financing solution to boost net working capital, AR financing has its advantages and drawbacks. Before moving forward with AR financing, you should be aware of both the good and the bad, making sure that you’re informed and won’t be caught off guard. Here’s how to identify the best factoring companies:
Read more about the advantages and disadvantages of AR financing.
With AR financing becoming more and more popular in recent years, there is an ever-increasing number of factoring companies vying for your business. That can make it difficult to determine which is best for your business.
Here’s a list of questions you should ask before signing a contract:
Read more about choosing the best provider.
Both invoice factoring and accounts receivable financing benefit businesses by providing funds in advance of collection. When cash flow timing matters most, both of these alternative financing options quickly put money into the business. In addition, both offer professional credit services and receivables management.
The main difference between invoice factoring and accounts receivable financing lies in the underwriting criteria of the deal structures. While factoring offers greater flexibility, AR financing has more strictness around the credit profile. Consequently, AR financing typically offers preferred financing terms. Some businesses use these terms interchangeably, as factoring is a specific form of accounts receivable financing.
There are a number of questions to ask yourself before determining if AR financing is a fit for your business. Not every business has the same customers, payment terms, operating history, etc., and thus there’s not one type of financing for everyone. Not all business use COD payment terms. Some businesses have established credit and can efficiently acquire bank loans. Others sell products and services that aren’t capable of being factored.
Here are the top four indicators that your business is a fit for A/R financing:
Once you submit your quote request, a representative will be in touch with you within 24 hours. We move quickly so that your business keeps growing.
If you’re thinking AR financing could be a good solution to your working capital problem, apply today. Unlike most other AR financing providers, altLINE is a bank. That means we’re a direct source of funds, reducing our borrowing costs so we can pass on more savings to you. As a bank, we’re also fully regulated which means we’re we’re more transparent and trustworthy than the competition. Find out more about why Investopedia, Forbes, Nerd Wallet, TheBalanceSMB, Fundera, Solution Scout, Merchant Maverick, FitSmallBusiness, and Business.com rated us Top Factoring Company.