Accounts receivable financing is a tool businesses can use to overcome short-term cash flow gaps by borrowing against their unpaid invoices. Unlike invoice factoring, with AR financing you won’t assign or sell your invoices to your provider. Invoice financing works like a credit line, with funding in one to three days and lower costs than many alternatives.
Fundbox, our recommended accounts receivable financing company, offers AR financing between $1K – $100K. Although your credit will be checked, Fundbox is one of the few small business loan options without a minimum credit score requirement. Get prequalified online in minutes, approved in hours, and funded in 1–3 business days.
How Accounts Receivable Financing Works
Accounts receivable financing allows small businesses to establish a credit line based on the value of their unpaid accounts receivables. AR financing turns B2B, B2G, and B2C invoices owed within 30 to 90 days into short-term working capital. Rates typically range from 0.5 percent per week to 5 percent per month, and you can borrow between $1,000 and $5 million.
The AR financing application process is very easy. In general, you create an account online with a provider and sync your accounting or invoicing software so they can review your business’ recent activity. This takes just a few minutes. You can then pick the invoices you want to finance and get funded within one to three days. Your clients continue to direct their invoice payments to you, and you continue to operate your business normally.
When comparing invoice financing to invoice factoring, you’ll find AR financing more flexible. You can pick the invoices you want to finance at any time without large monthly minimum financing requirements. AR financing doesn’t require the sale or assignment of your invoices to your provider, which invoice factoring requires. This means that you get to maintain control of all communications to your customers with AR funding.
Who Accounts Receivable Financing Is Right For
AR financing is excellent for businesses with short-term cash flow needs, such as paying rent, making payroll, or purchasing seasonal inventory. While a small business line of credit (LOC) addresses these same expenses, the qualifications are more difficult. If you’re struggling to get approved for a LOC, you might have an easier time with invoice funding.
Unlike short-term business loans, you don’t have to reapply for every time you need cash. Instead, you just select the qualified invoices you’d like to have advanced and the funds will hit your bank account in a day or two. Its quick funding makes it ideal for borrowing up to 90 days.
AR financing isn’t a good financing choice for long-term investments, such as commercial real estate, equipment financing, consolidating high interest business debts, or startup funding. Rather, invoice financing is intended to provide short-term working capital financing against your invoices. You can use AR financing proceeds to meet short-term financing needs, like payroll and operating expenses.
Invoice Financing Companies
Accounts receivable financing is offered by both traditional banks and online lenders. Fees are usually a small percentage of the invoices financed. We compared the costs and qualifications of two of the best online invoice financing companies. The benefit to online invoice financing companies is they’re typically able to get you funded within three days.
The AR financing costs and qualifications of two providers, Fundbox and BlueVine, are:
AR Financing Provider Cost & Qualification Comparison
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| AR Funding Amounts | ||
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| Repayment Time | ||
| Repayment Frequency | ||
| Discount Rate | ||
| Other Fees | ||
| Advance Rate | ||
| Invoice Qualifications | ||
| Credit Score | ||
| Accounting/Invoice Software Connection |
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When to Use Fundbox
Fundbox is best for businesses needing up to $100,000 without the hassle of selling their invoices. Fundbox supports integration with over a dozen accounting software programs, making it easy to provide your information. Plus, since it has no minimum credit score requirement, a wide range of borrowers can qualify. Read more in our review of the best accounts receivable financing companies.
When to Use BlueVine
BlueVine is a best for businesses needing more than $100,000 and up to $5,000,000 in invoice financing. Unlike some invoice financing companies, BlueVine won’t communicate directly with your customers. This means you get to go about your business as usual. Plus, if you need additional financing, BlueVine also offers a $250,000 small business line of credit. Read more in our review of the best accounts receivable financing companies.
When to Use an Alternate Invoice Financing Company or Invoice Factoring
Some accounts receivable financing companies specialize in specific industries or businesses. An example of this is Payability, which offers accounts receivable financing to ecommerce businesses. Choosing a provider with knowledge and specialty in your industry can be beneficial to your business. Read more in our review of the best accounts receivable financing companies.
There are also times when invoice financing won’t work for your business, such as if you need funding amounts greater than the $5 million offered by BlueVine. A great alternative for this type of situation is invoice factoring. Some of the best invoice factoring companies offer limits as high as $20 million. Limits this high can give your company plenty of room to grow.
AR Financing Costs
One of the biggest advantages to accounts receivable financing is the straightforward cost structure. With other financing options, you may be charged origination fees, processing fees, and other hidden fees. With AR financing, you typically pay a single fee on each invoice you finance, either with your weekly payment or when your customers pay their invoices.
The typical costs of AR financing are:
- Discount Rate: Starting at 0.25 percent to 0.7 percent per week
- Origination Fee: Typically not required
- Prepayment Penalty or Termination Fee: Typically not required
- Additional Fees: Possibly a fee for wire transfers
With invoice financing, often no other fees are charged other than the discount rate. This is not always the case, though, as the fees vary by invoice financing company. For this reason, it’s very important to read your accounts receivable financing agreement to make sure there are no hidden fees. The last thing you want is to be surprised by unexpected charges.
Cost of Accounts Receivable Financing Example
You might use AR financing to help finance your busy season or get through a month with tight cash flow. Many small business owners turn to short-term loans or merchant cash advances in a cash crunch. However, if you only need money for a short time (30 to 90 days), AR financing is generally a much cheaper option.
For comparison purposes, the table below shows the cost of both common alternatives compared to the total cost of AR financing:
AR Financing vs Business Loans
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| Cost | |||
| Term Length | |||
| Frequency of Payments | |||
| Total Cost of Capital |
As shown, the total cost of other short-term financing is more expensive than what you will typically pay with AR financing if you plan on repaying your funds in three months or less. Smaller financing amounts also work much better with AR financing if you are looking to save costs compared to other financing options.
Fundbox is fast and flexible. You can get invoice funding up to $100,000 with rates starting at 0.5 percent to 0.7 percent weekly and repayment terms of 12 or 24 weeks. This allows you to solve cash flow issues affordably. You can apply online in minutes, be approved in hours, and funded in one to three business days.
Accounts Receivable Financing Qualifications
With accounts receivable financing, there are very few qualifications you must meet. Your credit score is sometimes not a major qualifying factor (Fundbox has no minimum requirement, but BlueVine requires 530+). What’s important in AR financing is the creditworthiness of your customers. This can be demonstrated through a business credit check, their payment history to you, and their reputation.
The qualifications will depend on your AR financing provider, but some of the factors are:
- Business Annual Revenue: If your revenue is trending up for six or more months, then you will likely be considered a stronger borrower and increase your approval chances.
- Accounting History: The more accounting history your provider has to review, the better your profile may look. This is especially important for businesses that operate in industries that traditional lenders find risky.
- Late Payments: Since this is often used as a working capital solution, it should be noted that your best chances of being approved come before you’re late on your own current payments.
While there are fewer minimum requirements, the health of your business is still important. Your provider will have data showing them how your business profile is expected to perform in the future. For example, if your provider has seen businesses in your industry fail to repay the money advanced, then your qualification requirements may increase. If your industry is naturally riskier than others, you should expect to be stronger than past borrowers to be approved.
Pros & Cons of AR Financing & Invoice Financing
AR financing is popular with small businesses operating in a lean environment, high-growth companies, and those struggling to get traditional bank financing. While this is a popular working capital management option, there are pros and cons. Some of the pros include a simple qualification process and fast funding. The cons include short repayment terms.
Pros of AR Financing & Invoice Financing
The pros of accounts receivable financing include:
- Fast Funding: You can be approved in hours and funded in as soon as one business day.
- Easy Application Process: Traditional bank loans can be time-consuming processes that require lots of paperwork. AR financing requires little paperwork, and only takes a few minutes for you to fill out an application and connect your accounting software to your provider.
- Low Qualification Requirements: If you have outstanding invoices and have a three- to six-month accounting history, then AR financing is typically easier to qualify for than traditional financing. If you’ve been turned down by banks but meet these standards, then this may be the financing solution you need.
- Flexibility: You get to pick and choose which invoices you want to finance. There is no requirement as to which customer invoices you must include.
Cons of AR Financing & Invoice Financing
The cons of accounts receivable financing include:
- Short Repayment Term: The repayment term for invoice financing is typically short, with up to 12 weeks being typical. If you need longer than 24 weeks to repay, then AR financing might not be the right option.
- High Cost: The cost of invoice financing versus other short-term options is favorable if you repay quickly (typically within three months). However, it can become more expensive than other options if you need longer to repay.
- Repayment Responsibility: With accounts receiving financing, if your customer doesn’t pay its invoice, you’re still on the hook to repay your provider, as with a normal business loan. This is different from some forms of invoice factoring, where the provider takes the risk of your customer not paying.
4 Steps to Get Accounts Receivable Financing
Getting started with accounts receivable financing is a quick and easy process. Unlike other types of short-term financing, it doesn’t require a lot of paperwork. This means you can typically get funded much quicker than with other financing options. There are four main steps to getting funded through your invoices with accounts receivable financing.
The four steps to getting account receivable financing are:
1. Create an Account & Sync Your Accounting Software
The first step to getting financing based on your invoices is to create an account with an AR financing provider like Fundbox. Setting up an account is typically free and takes just minutes. Once your account is set up, the provider will ask you to connect your accounting or invoicing software. Almost all providers work with QuickBooks, and most work with other popular QuickBooks alternatives like Xero and Freshbooks (Fundbox is compatible with most invoicing and accounting software).
2. Select Approved Invoices You Want to Finance
When your account is set up with your AR financing provider, then you’re ready to choose which of your outstanding invoices you want to finance. With the dollar amount of financing you need in mind, you select which invoices you want to clear to meet that need and start the invoice funding process. The process to do this with online lenders like BlueVine and Fundbox is simple.
3. Your Provider Advances Up to 100% of the Selected Invoices
As soon as you choose the invoices you want to finance, your provider begins to process payment of your funds. Every provider advances a different percentage of your unpaid invoice. For example, Fundbox advances you 100 percent of the invoice’s value while their competitor, BlueVine, advances 85 percent to 90 percent of the invoice’s value. You will typically receive the funds in your bank account in one to three business days.
4. Repay Your Provider with Weekly Payments
After you receive your funds, then you enter the repayment phase, which typically requires weekly payments that include the principal amount and a small fee that varies by provider. Fundbox’s discount rate starts at 0.5 percent per week, while BlueVine’s discount rate starts at 0.25 percent per week. Fundbox allows you to pay back your invoices in either 12 weeks or 24 weeks. With BlueVine, the amount you borrowed will be repaid as your customers pay their invoices.
Fundbox is easy to setup and they sync with the largest number of accounting and invoicing software providers. Fundbox advances up to 100 percent of your invoice value and has rates as low as 0.5 percent per week. You can borrow up to $100,000, and be funded in as soon as one day.
AR Financing vs. Invoice Factoring
If accounts receivable financing is not right for you but you still are looking to get an advance on your invoices, then you may want to consider invoice factoring. It works a lot like AR financing with a few differences, such as having a more extensive application process.
The other main differences between Invoice Financing and Invoice Factoring include:
Invoice Financing vs. Invoice Factoring Comparison
| AR Funding Amounts | ||
| Assignment of Invoices | ||
| Customer Contact by Your Provider | ||
| Invoice Type | ||
| Repayment Frequency |
Invoice Financing vs. Invoice Factoring
More details about the differences between Invoice Financing and Invoice Factoring are:
- Invoice Funding Amounts: You’ll get access to larger funding amounts with invoice factoring. This might be a good benefit if you want to fund a larger purchase or have a sizable season-related cash flow need. But there is also typically a minimum of $10,000 or more that you must factor every month.
- Assignment of Invoices: This is a big difference that some business owners don’t like. Factors will buy your invoices and own all the rights to collect on those invoices. This means that your customers will know that they must pay your factor instead of you.
- Customer Contact by Your Provider: Every factor does it differently, but each reserve the right to collect on invoices and contact your customer to do so. Some will operate as a collections arm of your company, but all will require a communication from either them or you telling your customer who to pay going forward (the factor).
- Invoice Type: Traditional invoice factoring will not fund your B2C invoices, but all invoices could qualify with AR financing.
- Repayment Frequency: While AR funding requires weekly payments, invoice factoring typically requires no payments until your customer pays off the invoice. This means that you can keep the upfront funds and not worry about your cash flow to make payments, as long as your customer pays their invoice on time.
When to Use Invoice Financing
Invoice financing is best if you need up to $5,000,000 in short-term working capital against your AR and don’t want to deal with selling your invoices to your provider. Invoice financing is also the best option if you don’t want your provider to contact your customers. Further, invoice financing is best if you don’t mind making weekly payments or you have B2C customers. Read more in our review of the best accounts receivable financing companies.
When to Use Invoice Factoring
Invoice factoring is best if you have B2B or B2G customers and need up to $20 million in short-term working capital. It’s also best if you need to factor $25,000 of invoices or more per month, as most invoice factoring companies have minimum factoring limits of at least these amounts. You can expect your provider to contact your customers, and your advances will be repaid as your customers pay their invoices. Read more in our review of the best invoice factoring companies.
Alternatives to Accounts Receivable Financing
While AR financing is an excellent option for a lot of businesses, it might not always be the best option for your company. This could be because you need a larger funding amount. Alternatively, it could be that you don’t have any invoices to borrow against. Or maybe you have good credit, and you can qualify for more affordable financing. The good news is you have options.
Some potential alternatives to accounts receivable financing include:
Invoice Factoring
Invoice factoring can be a good option if accounts receivable financing is not right for you but you still want to borrow against your invoices. While it works a lot like AR financing, there are a few differences and it allows for larger funding amounts. To get a larger funding amount, you’ll typically need to assign your invoices to your provider and give them some customer control. We recently reviewed some of the best invoice factoring providers, if you want to dig in further to this option.
Small Business Line of Credit
A small business line of credit (LOC) allows you to make advances against a pre-established credit limit. An advantage to this is you only pay interest on the amount advanced. This is a great alternative if you’re only looking to bridge a short-term need and if you have good credit. Check out our article about some of the Best Small Business Lines of Credit.
Small Business Credit Card
An alternative to accounts receivable financing is a small business credit card, which is another short-term financing option popular amongst small businesses. A business credit card is a good option for businesses that are very small, want to manage employee expenses, or earn rewards. Want to learn more about some possible options? Read our article about some of the Best Small Business Credit Cards.
AR Financing Frequently Asked Questions (FAQs)
This article has provided a lot of information about accounts receivable financing and invoice financing. However, as with any lending program, some questions are asked more frequently than others, which we’ve tried to address here. If we haven’t answered your question, feel free to share it with us in our forum and we’ll provide an answer.
The following are some of the most frequently asked questions about AR financing:
What Happens When a Customer Pays Their Invoice in AR Funding?
In accounts receivable financing, there is typically no change to how your customers pay their invoices. They’ll make payments to you in your name. With most providers, like Fundbox, you make weekly payments to your provider. With other AR financing providers, like BlueVine, the amount you borrowed is automatically repaid when your customer pays their invoice.
Does It Help if My Provider Understands My Business in Invoice Financing?
Choosing an AR financing provider who understands your business can affect if you can be approved and for how much. With this knowledge, they understand what’s normal for your industry, even if it doesn’t look great on paper. Some providers cater to certain businesses, like Payability, which helps ecommerce sellers. A knowledgeable provider can add value.
How Quickly Can I Get Funded with AR Financing?
A benefit of accounts receivable finance is its quick funding. With invoice financing, you’ll typically begin by creating an account with the provider and connect your accounting software. This takes a few minutes and you’ll select the invoices you want to finance. If approved, you’ll receive the funds in your bank account in one to three business days.
Will My Accounts Receivable Financing Provider Contact My Customers?
Unlike invoice factoring, with accounts receivable financing your provider will not contact your customers. This is because AR financing doesn’t require the sale or assignment of your invoices to your provider. This means you get to maintain control of your customer communication with AR funding. Your customer relationships are unchanged and continue to operate as normal.
How Can I Qualify for Accounts Receivable Financing?
While qualifying for most short-term financing is based on your financial strength, that’s not the case with AR funding. Since repayment is tied to your customers paying their invoices, the ability of your customers to repay is typically the most important. Your provider will consider your customers combined with your financial history in its approval.
How Do I Choose an Accounts Receivable Financing Provider?
When choosing an accounts receivable financing provider, it’s important to make sure the company can provide you with the amount of financing you need. It’s also important to make sure you can meet its minimum monthly financing requirements. You should take time to compare the available accounts receivable financing providers, including their reputations.
Scott Blaeser, a Vice President with Crestmark Bank, provided the following advice for business owners as they’re considering accounts receivable financing:
“An important first step is to research the accounts receivable financing firm, to make sure they’re reputable. The last thing a business owner wants is to be put in a bad financial situation if their provider fails. Leaning on trusted advisors, such as a CPA or a well-known banker, is a great way for business owners to find a reputable firm.”
– Scott Blaeser, Vice President and Business Development Officer with Crestmark Bank
“An important first step is to research the accounts receivable financing firm, to make sure they’re reputable. The last thing a business owner wants is to be put in a bad financial situation if their provider fails. Leaning on trusted advisors, such as a CPA or a well-known banker, is a great way for business owners to find a reputable firm.” Bottom Line
Accounts receivable financing is good for solving short (30- to 90-day) cash flow gaps, with funding in as soon as one day. It’s typically cheaper than other short-term financing options, and easier than invoice factoring. If you need more than $100,000, you should consider BlueVine. If you need $100,000 or less, we consider Fundbox the best solution.
Fundbox offers the fastest accounts receivable financing solution we’ve reviewed. With Fundbox, you can get a credit line of up to $100,000 based on the value of your invoices. You’ll pay as little as 0.5 percent of your financed invoices weekly. You can apply online in a few minutes, be approved within hours, and funded in as soon as one business day. Your advances will be repaid with weekly installments over 12 or 24 weeks.
Elliott Wong
August 16, 2018 at 10:12 amGreat read and explanation of AR Financing. Regarding AR Financing vs Invoice Factoring, what are the differences in securities required?
Megan Hanna
August 18, 2018 at 12:00 amHi Elliott,
The terms invoice financing and AR financing mean the same thing. The security (collateral) you’ll provide with AR and invoice financing depends on the lender. Some lenders offer AR and invoice financing on an unsecured basis or require just a blanket UCC filing on your business assets, such as Fundbox. Other lenders will actually purchase your invoices, such as Paragon Financial Group.
Best of luck!
Megan