Accounts Receivable Financing: Costs, Terms & Qualifications
This article is part of a larger series on Business Financing.
Accounts receivable (AR) financing is a tool businesses use to address short-term cash flow gaps by borrowing against their unpaid invoices. AR financing, also known as invoice financing, costs as little as 0.25% of the invoice value for each week that the invoice is outstanding. The funding amounts vary from as little as $500 to $5 million or more. The lender typically collects the invoice on behalf of the business and uses the proceeds to repay the loan.
FundThrough offers an Express Invoice Financing program that’s geared for businesses that need small invoices financed quickly. Eligibility for the Express Invoicing Program varies based on business type, but FundThrough also offers customized solutions that businesses can take advantage of. For small or newer businesses in a cash flow crunch, FundThrough can provide needed relief.
A look at AR Financing Costs, Terms & Qualifications
When comparing invoice financing to invoice factoring, business owners find that AR financing is more flexible. However, factoring can provide more financing 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 handled by a third party.
Accounts Receivable Financing Costs
AR financing costs include:
- Starting discount rate: 0.25% to 0.75% per week
- Estimated APR: 13% to 80%
- Origination fee: Up to 1.5%
- Additional fees: Wire transfer fee, automated clearing house (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. Most AR lenders will not charge fees for origination or annual renewal of the relationship; however, some will.
Accounts Receivable Financing Terms
AR financing terms include:
- Loan amount: $500 to $5 million
- Advance rate: Up to 90%
- Repayment term: As customers repay invoices, typically no more than 90 days
- Speed of funding: Within three days in most cases
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. Most lenders will fund within three days, with more complex arrangements requiring a week or perhaps 10 days.
Accounts Receivable Financing Qualifications
AR financing qualifications include:
- Credit score: Requirements range from no minimum to as high as 600
- 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 AR financing companies require at least $50,000 in annual revenue and 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.
Your Customer’s Payment History Is Important: A customer’s payment history 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
There are several scenarios where AR financing makes sense. These include:
- 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.
- 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.
There are many other situations that AR 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.
How To Obtain Accounts Receivable Financing
AR financing can be helpful for businesses, and there are a few simple steps to follow to get financing.
1. Set Up an Account
The first step to getting financing based on invoices is to create an account with an accounts receivable 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 your invoicing software to your AR 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, especially if you have slower-paying customers.
3. Collect the Advance
After selecting the invoices, the AR financing company processes the payment. Every provider advances a different percentage of the unpaid invoice. FundThrough, for example, advances up to 100% of the invoice’s value, but its competitor, BlueVine, advances up to 90%. In most cases, businesses receive the funds in one to three business days.
Advantages & Disadvantages of AR Financing
Accounts receivable financing offers business owners quick funding speed and a simple application process that saves valuable time. However, the option isn’t good for long-term financing, and it can be much more expensive than other financing options.
Advantages of AR Financing
- Quick funding speeds: Lenders can approve funding in hours and deposit funds in one to three business days in many cases. 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 loan applications can be a time-consuming process that requires substantial paperwork. AR financing requires little paperwork—it takes only 15 minutes to fill out an application and to connect accounting software to the provider.
- Low minimum qualifications: Businesses with outstanding invoices and at least three 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 AR financing to be the best one available.
Disadvantages of AR Financing
- Short repayment terms: The repayment term for invoice financing is short, with terms often only extending out to 90 days. Businesses needing longer repayment terms may want to consider a small business loan or line of credit.
- 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.
- Possible origination or other hidden fees: Some financing companies will charge an origination fee, an annual fee, or other charges. While these fees are often modest, they can add up. Review any agreement before you sign off on it so you can be aware of potential extra charges.
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 for slow-paying customers to send in a check, applicants can receive substantial funding at low starting rates of 0.25% per week 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.