Accounts receivable (A/R) financing, sometimes referred to as invoice financing, can provide your business with funds if you have unpaid invoices you’ve issued to customers. This can be helpful for companies that have a large amount of earned revenue that is yet to be received. It’s usually possible to get up to $10 million in funding, which can be used to pay for expenses or cover temporary cash flow shortages.
FundThrough is a provider we recommend if you need A/R financing. While most providers only fund up to a certain percentage of your invoice amounts, FundThrough can advance up to 100% of your outstanding invoice balances. It also allows you to streamline funding by linking your accounting software.
How Accounts Receivable Financing Works
If you’ve issued invoices to customers requesting payment, A/R financing is a way to get an advance on that money. Below are the steps describing the initial stages of getting funds, all the way to the last stages involving loan repayment.
Verify details of your outstanding invoices
Reviewing details of your outstanding invoices can give you a better idea of how much of a loan you can get and how much it might cost. This is because many A/R financing lenders only issue a percentage of your invoice amounts. Additionally, A/R financing companies also typically charge a weekly or monthly rate, meaning that the longer it takes for your customers to pay, the more fees you’ll need to repay.
Apply for A/R financing
Once you have a summary of your outstanding invoices, you’ll need to find a lender that issues A/R financing and submit a loan application. Banks, credit unions, business loan brokers, and online lenders are several sources you can consider. If you’re unsure where to start, you can begin with our recommendations of the best accounts receivable financing companies.
As part of the application process, expect to provide copies of your invoices and other financial documents. These allow the lender to verify your eligibility and determine what rates and fees you’ll be eligible for.
If you prefer getting guidance through this process, Lendio is a good option. Working with a company like it means you’ll get a dedicated funding specialist who can advise you on the best financing options for your company’s needs, qualifications, and goals.
Review and accept financing terms
If the A/R financing company determines you’re eligible, it will issue you paperwork stating the terms of your loan approval. Review this document as it will contain information about the fees you’ll be charged, the loan amount, and the repayment terms. If these items are acceptable, you can sign to accept the terms. Most A/R financing companies can then issue funding within 24 to 72 hours.
Verify receipt of funds
Once you’ve accepted the terms of your loan and your lender states that loan proceeds have been disbursed, it’s always a good idea to check that you’ve received the correct amount of funds in your account. Funds you receive from A/R financing can be used for several business purposes, such as payroll expenses, inventory, and other working capital needs.
Monitor and collect payment from customers
Although you’ve received an advance on your outstanding invoices, you’ll still need to ensure your customers pay you on time. Keep an eye out for invoices approaching their due dates and follow appropriate collection procedures as needed.
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Make final payment to the A/R financing company
Once your customers have paid the invoices owed to your business, the final step will be for you to pay off the A/R financing company. This will typically be the initial amount of the loan, plus the fees you agreed to pay.
Pros & Cons of Accounts Receivable Financing
A/R Financing: Typical Rates, Terms & Qualification Requirements
Rates, terms, and qualifications will vary depending on the lender you choose and the strength of your loan application. However, below are typical figures you’re likely to see when shopping rates.
Typical Rates & Terms | |
|---|---|
Fee Structure | 1% to 5% monthly fee |
Estimated APR | 30% to 90%-plus |
Funding Amount | Up to $10 million |
Advance Rate | 90% to 97% |
Repayment Term | 90 days to 1 year |
Funding Speed | 1 to 3 days |
Typical Qualifications | |
Credit Score | 550-plus |
Time in Business | 3 to 6 months |
Monthly Revenue | $5,000 to $10,000 |
Personal Guarantee | May be required |
Example of Accounts Receivable Financing Costs and Terms
To give you an idea of how much A/R financing costs and how it works, we’ll use the following set of assumptions:
- Invoice amount your company has issued and is awaiting payment: $100,000
- Invoice due date: Two months (60 days)
- Maximum advance rate of the A/R financing lender you’ve chosen: 90%
- A/R financing company’s rate: 3% per month
With the scenario above, below is an example of the timeline and fees that would have to be repaid.
Calculation Method | Final Figure | |
|---|---|---|
Maximum Advance Amount | (Invoice amount) × (maximum advance rate) | $100,000 × 90% = $90,000 |
Fees Charged | (A/R financing rate) × (invoice due date) | (3% per month) × (2 months) = 6% |
Amount Owed to A/R Financing Company | (Fees charged) × (invoice amount) | 6% × $100,000 = $6,000 |
Net Amount Paid Back to You | (Invoice amount) – (amount owed to A/R financing company) | $100,000 – $6,000 = $94,000 |
With the example above, using A/R financing for a $100,000 invoice would leave your business with $94,000 after the entire transaction is complete. This comes out to an annual percentage rate (APR) of around 39.35%.
Since accounts receivable financing does not use a traditional interest rate, we recommend using an APR calculator, like Nav’s Invoice Financing APR Calculator, to compare the cost of this type of loan to other financing options.
Who Should Consider Accounts Receivable Financing?
A/R financing can provide your company with the funding needed to cover other business expenses. However, it tends to be more expensive than many other financing options. With that being said, here are some scenarios that may indicate A/R financing is a good fit for you:
- Businesses with a large amount of outstanding invoices: Most A/R financing companies require at least $10,000 of outstanding invoices to be eligible for funding. This is also tied to the amount of funding a business can get.
- Companies needing funds to cover short-term expenses: Because of the higher APRs, A/R financing is generally a better option for covering short-term expenses. Additionally, paying off the loan more quickly could help reduce the amount of fees you’ll need to pay.
- Startups and businesses with low credit scores: A/R financing’s qualification requirements make it easier for startups and businesses with bad credit to get financing. This is because it places a larger emphasis on the details of a company’s invoices, such as the repayment terms, outstanding amounts, and types of customers the invoices have been issued to.
- Businesses without other sources of funding: Since many other loan options have lower APRs, we recommend exploring those options before considering A/R financing. Some examples include term loans and business lines of credit. However, if you’re unable to get approved, many of the best A/R financing companies can still offer competitive pricing.
How To Get Accounts Receivable Financing
If you decide to get A/R financing, we’ve summarized the steps you can take below. We also have a detailed guide on how to get a small business loan that provides additional tips and recommendations for how you can improve your approval odds and get funded quickly:
- Step 1: Confirm why you need funds and how you’ll use the money.
- Step 2: Consider available loan options.
- Step 3: Review your qualifications.
- Step 4: Choose a lender and apply.
- Step 5: Review and accept loan terms.
Frequently Asked Questions (FAQs)
Accounts receivable financing gives you a cash advance on invoices you’ve issued to customers but have not yet received payment for. Most lenders advance up to a certain percentage of the outstanding invoice amount and will charge a weekly or monthly fee until the loan is repaid.
No. With invoice factoring, your invoices are sold to a factoring company, which then collects payment on behalf of your company. Meanwhile, accounts receivable financing allows your business to retain control of collecting payment. You can learn more about the differences in our guide on what invoice factoring is.
It depends, but A/R financing generally is easier to get than most traditional loans. This is because your eligibility is typically based on the types of customers you’ve issued invoices to and the amounts owed.
Bottom Line
Accounts receivable financing can be a good way to get money fast if you have a lot of outstanding invoices to clients. However, because it can be an expensive form of financing, we recommend using an APR calculator to understand its true cost. You can also consider other types of loans, including our recommendations for the best working capital loans. Regardless of what you choose, be sure to shop rates from multiple lenders to get the best rate possible.
