What Accounts Receivable Financing Is & Who It’s Right For

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, businesses don’t assign or sell their invoices to A/R financing lenders. Invoice financing costs as little as 0.25% of the invoice value per week that the invoice is outstanding.

FundThrough, our recommended accounts receivable (A/R) financing company, offers A/R financing with no funding limit. It has no minimum credit score, time in business, or annual revenue requirement. Business owners can upload an invoice and receive funding for a flat fee the same day.

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How Accounts Receivable Financing Works

Accounts receivable financing allows small businesses to borrow funds based on the value of their unpaid receivables. The funding amounts vary from as little as $1,000 to $5 million or more. The lender typically collects the invoice on behalf of the business and uses the proceeds to repay the loan.

The invoice financing application process is very easy. In general, applicants create an account online and sync accounting or invoicing software so they can review recent activity. Applicants can then pick the invoices to finance, with the invoices acting as collateral, similar to other asset-based lending options. Clients continue to direct their invoice payments to the business, and everything operates normally.

When comparing invoice financing to invoice factoring, business owners find A/R financing more flexible. However, factoring offers substantially more funding and typically has lower rates. The biggest difference between the two is the way invoice collections are handled. With invoice factoring, customers pay the factoring company directly, bypassing the business, which reduces risk but also alerts customers that their invoices are being factored.

Accounts Receivable Financing Costs

A/R financing costs include:

• Starting discount rate: 0.25% to 0.7% per week
• Estimated APR: 10% to 80%
• Origination fee: None
• Additional fees: Wire transfer fee; ACH is free

Lenders charge a discount rate for invoice financing because it’s calculated against the value of the invoice financed. This rate is low, rewarding businesses that have fast-paying customers. The resulting APR leads to a daily interest cost between $2.75 and $22.90 for every $10,000 in accounts receivable financed.

Accounts Receivable Financing Terms

A/R financing terms include:

• Loan amount: $1,000 to $5 million
• Repayment term: Whenever a customer pays an invoice
• Speed of funding: One to three business days

Individual loan amounts offered by lenders will vary; however, invoice financing is one of the largest funding options available. If the lender collects the invoice from a customer, then those payments are applied to repay the financing.

Accounts Receivable Financing Qualifications

A/R financing qualifications include:

• Credit score: Requirements range from no minimum to as high as 550
• Annual revenue: At least $50,000
• Time in business: At least three months
• Invoice quality: Creditworthy business or government customers
• Paperwork: Invoices, driver’s license, voided business check, and bank statements

Exact qualifications vary by lender; however, most A/R financing companies require at least $50,000 in annual revenue and an operational history of at least three months. This is to verify the consistency of customer payments and ensure that customers won’t default on invoices. The creditworthiness of customers has more weight than an applicant’s credit, which helps business owners with low credit scores get funding.

Who Accounts Receivable Financing Is Right For

Accounts receivable financing is best for businesses that invoice their customers and need access to capital sooner. Sometimes, this may be because customers are taking too long to pay. Growing businesses also can use A/R financing because their need for capital often exceeds revenues.

A/R financing is best for:

• Business owners with low credit scores: Accounts receivable financing companies rely on the creditworthiness of a borrower’s customers and offer lower credit score requirements.
• Small businesses that invoice customers: Businesses must invoice customers to qualify, and they can shorten their collection period and access working capital with invoice financing.
• Companies with slow-paying customers: If customers are taking too long to pay, invoice financing can be an inexpensive, short-term funding solution.
• Independent contractors who bill clients for large projects: Long projects require contractors to cover expenses until the project is complete or a customer pays the invoice.

There are many other business scenarios that A/R financing is right for, and each business can find some benefit in reducing the time it takes for invoices to get paid. Once a business determines that accounts receivable financing is the best option for funding, it’s important to select a provider that offers the right amount of funding with rates and terms that can help the business flourish.

Best Accounts Receivable Financing Companies

Selecting an account receivable financing company often depends on whether a business can qualify, get enough funding, and afford the payments. The primary restriction for most businesses is the annual revenue and APR of the loan. Businesses will want to choose the lowest rates and largest potential funding amounts to scale their business.

Top 3 Accounts Receivable Financing Providers

FundThrough

FundThrough offers both invoice financing and factoring with no limit. It has a quick online application and is best for small businesses that are growing quickly and anticipate needing access to additional funding. There are no minimum qualifications, and business owners can upload an invoice to get started.

BlueVine

BlueVine is best for businesses needing more than $100,000 and up to $5 million in invoice financing. Unlike some invoice financing companies, BlueVine won’t communicate with the borrower’s customers to collect invoices. This means that customers are unaware that invoices are being financed. Plus, businesses needing additional financing can also qualify for a term loan and a line of credit from BlueVine.

Payability

Payability provides ecommerce marketplace sellers with financing to replenish inventory and expand operations. Business owners can skip the time it takes Amazon, Walmart, Etsy, and other marketplaces to make payments, and they receive their payments daily. This allows them to invest in the business more quickly and replenish inventory to keep up with growth.

Getting Accounts Receivable Financing in 3 Steps

A/R financing can be helpful for businesses, but it’s important to follow the right steps to get financing. First, a business owner selects a lender, submits an application, and gets approved for funding. Then the lender will provide an option to select which invoices to finance. After selection, the lender will approve funding and deposit the money in a business checking account. When customers pay their invoices, the funds are applied to repayment.

The three steps to receiving A/R financing are:

1. Set Up an Account

The first step to getting financing based on invoices is to create an account with an A/R financing provider. After the initial setup, applicants can connect accounting or invoicing software. In some cases, business owners can upload an invoice directly for consideration.

2. Select Receivables to Finance

After connecting to the invoicing software to an A/R financing provider, the business owner selects which invoices to finance. It may be tempting for some business owners to borrow as much as possible, but overborrowing can have a large negative impact on cash flow.

3. Collect the Advance

After selecting the invoices, the A/R financing company processes the payment. Every provider advances a different percentage of the unpaid invoice. FundThrough, for example, advances 100% of the invoice’s value, but its competitor, BlueVine, advances 85% to 90% and businesses receive the funds in one to three business days in most cases.

Advantages & Disadvantages of A/R Financing

Accounts receivable financing offers business owners quick funding speed and a simple application process that saves valuable time. This can be a relief for businesses needing quick funding with simple-to-meet minimum qualifications. However, the option isn’t good for long-term financing and it can be much more expensive than other financing options.

Advantages of A/R Financing

• Quick funding speeds: Lenders can approve funding in hours and deposit funds in one business day. This makes it a great option for businesses needing funds to take advantage of an opportunity or solve a disruption like broken equipment.
• Simple application process: Traditional bank loans can be time-consuming processes that require lots of paperwork. A/R financing requires little paperwork, and only takes 10 minutes to fill out an application and connect accounting software to the provider.
• Low minimum qualifications: Businesses with outstanding invoices and three to six months of accounting history have an easier time qualifying for invoice financing than traditional loans. Businesses needing another solution after a bank turns them down may find A/R financing to be the best one available.

Disadvantages of A/R Financing

• Short repayment terms: The repayment term for invoice financing is short, with up to 12 weeks being typical. Businesses needing longer repayment terms may want to consider a different option than 24 weeks to repay, in which case A/R financing might not be the right option.
• High overall costs: The cost of invoice financing versus other short-term options is favorable if repaid quickly. However, it can become more expensive than other options if it is the financing solution of choice in the long term.

A/R Financing Frequently Asked Questions (FAQs)

What happens when a customer pays their invoice in A/R funding?

In accounts receivable financing, there is no change to how your customers pay their invoices. They’ll make payments to you in your name. With most providers, businesses make weekly payments depending on the draw. However, some factoring providers collect invoices directly from customers to repay the financing.

Does it help if my provider understands my business in invoice financing?

Choosing an A/R financing provider who understands your business can affect your approval chances. With this knowledge, lenders understand what’s normal for your industry, even if it doesn’t look great on paper. Some providers, like Payability, cater to certain businesses, which helps ecommerce sellers. A knowledgeable provider can add value.

How quickly can I get funded with A/R financing?

A benefit of accounts receivable financing is its quick funding. With invoice financing, you’ll begin by creating an account with the provider and connect your accounting software. This takes 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, your accounts receivable financing provider will not contact your customers. This is because A/R financing doesn’t require the sale or assignment of your invoices to your provider, which means you get to maintain control of your customer communication. Your customer relationships are unchanged and continue to operate as normal.

How can I qualify for accounts receivable financing?

You can qualify for accounts receivable financing based on the creditworthiness of your business and the companies you work with. The customers paying the invoices are important because their payments are tied to the financing. That’s why lenders consider the financial history of both parties.

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 best accounts receivable financing providers, including their reputations.

Bottom Line

Accounts receivable financing is a convenient way for business owners to access capital that is locked up in unpaid invoices. Rather than waiting weeks or months, applicants can receive substantial funding at low starting rates of 0.25% based on the value of outstanding invoices. As clients pay their invoices, the proceeds are used to settle the debt, making invoice financing easy to manage for small businesses.