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 AR financing lenders. Invoice financing costs as little as 0.25% of the invoice value per week that the invoice is outstanding.

Fundbox, our recommended accounts receivable financing company, offers AR financing between $1,000 to $100,000. Although Fundbox checks a business owner’s credit, it doesn’t have a stated minimum credit score requirement. Get pre-qualified online in minutes, approved in hours, and funded as soon as 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. You can pick the invoices you finance and receive a line of credit to draw from or advance up to 100% of the invoice value. Invoices are either paid directly to the lender or with regular payments from the borrower.

The AR financing application process is very easy. In general, applicants create an account online with the best accounts receivable financing companies and sync accounting or invoicing software so they can review recent activity. This takes just a few minutes. Applicants can then pick the invoices to finance and get fast business funding within one to three days. Clients continue to direct their invoice payments to the business, and everything operates normally.

When comparing invoice financing to invoice factoring, business owners find AR 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

AR 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

AR financing terms include:

• Loan amount: $1,000 to $5 million
• Repayment term: 12 to 24 weeks or 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, extending to $5 million. Sometimes, if a business receives a line of credit to draw from, it will have 12 or 24 weeks to repay the loan. If the lender collects the invoice from a customer, then those payments are applied to repay the financing.

Accounts Receivable Financing Qualifications

AR 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 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. 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 can also use AR financing because their need for capital often exceeds revenues.

AR 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 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.

Best Accounts Receivable Financing Companies

Selecting an accounts 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 that can qualify with any of the best accounts receivable financing companies will want to choose the lowest rates and largest potential funding amounts to scale their business.

Top 5 Accounts Receivable Financing Providers

Fundbox

Fundbox offers borrowers up to $100,000 in the form of a line of credit based on outstanding invoices. It accepts invoices from all sources and is best for businesses needing a small amount of flexible funding. APRs start at 10% and borrowers need at least $50,000 in annual revenue to qualify for funding as soon as the same day.

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.

FundThrough

FundThrough offers both invoice financing up to $50,000 and factoring up to $10 million. It has a quick online application and is best for small businesses that are growing quickly and anticipate needing access to additional funding. Business owners must meet minimum qualifications like six months in business and $100,000 in annual revenue to qualify.

Paragon Financial

Paragon Financial is one of the largest and most established invoice factoring providers. It only finances business and government invoices and has extensive experience across multiple industries, including construction and trucking. Business owners can get funding with low weekly starting rates of 0.25% on outstanding invoices.

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 4 Steps

AR 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 four steps to receiving AR financing are:

1. Set Up an Account

The first step to getting financing based on invoices is to create an account with an AR financing provider like Fundbox. After the initial setup, applicants can connect accounting or invoicing software. Most lenders work with QuickBooks and other popular QuickBooks alternatives like Xero and FreshBooks (Fundbox is compatible with most invoicing and accounting software).

2. Select Receivables to Finance

After connecting to the invoicing software to an 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. The process to do this with online lenders like BlueVine and Fundbox is simple.

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. Fundbox, 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.

4. Repay the Advance

After a business receives the funding, it enters the repayment phase, which sometimes requires weekly payments of principal and interest. Fundbox’s discount rate starts at 0.5% per week, while BlueVine’s discount rate starts at 0.25% per week. Fundbox allows businesses to repay a draw in either 12 weeks or 24 weeks. With BlueVine, as customers pay their invoices, the proceeds are applied to the financing.

Advantages & Disadvantages of AR 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 AR Financing

Advantages of accounts receivable financing include:

• 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. AR 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 AR financing to be the best one available.

Disadvantages of AR Financing

Disadvantages of accounts receivable financing include:

• 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 AR 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.

Alternatives to Accounts Receivable Financing

Businesses with outstanding invoices may sometimes need additional working capital to cover a large project or an ongoing expense like payroll or utilities. In these cases, a term loan or line of credit may be a better option for funding because of the longer repayment terms. Some business owners wanting to outsource the collection and processing of invoicing in addition to AR financing can apply for invoice factoring instead.

Alternatives to invoice financing include:

Invoice Factoring

Invoice factoring can be a good option for businesses wanting to borrow against invoices without using invoice financing. While it works a lot like AR financing, there are differences, including larger funding amounts, lower minimum qualifications, and slower funding speeds. The best invoice factoring companies offer businesses tailored solutions for financing.

The major difference between accounts receivable financing and invoice factoring include:

• Invoice funding amounts: Businesses can get access to larger funding amounts with invoice factoring. This might be beneficial for businesses needing financing for large purchases or projects. But there is also a minimum of $10,000 that a business must factor every month to qualify.
• Assignment of invoices: This is a big difference that some business owners don’t like. Factors will purchase invoices and own all the rights to collect on those invoices. This means that customers will know that they must pay the factor instead of the business.
• Qualifying invoice type: Traditional invoice factoring will not fund consumer invoices. The focus of factoring is on business and government transactions. However, all invoices could qualify with AR financing.
• Repayment frequency: While AR funding requires weekly payments, invoice factoring requires no payments by the borrower. This gives businesses added flexibility without reducing their weekly cash flow.

Small Business Line of Credit

A small business line of credit (LOC) allows businesses to draw advances against a pre-established credit limit. The best business lines of credit offer borrowers flexible repayment terms and only charge interest on the funds borrowed. This is a great alternative for businesses looking to bridge a short-term need and business owners with a good credit history.

Small Business Credit Card

An alternative to accounts receivable financing is a small business credit card, which is another short-term financing option popular among small businesses. The best small business credit cards are a great way to finance smaller expenses while earning rewards.

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, ask it in the Fit Small Business forum.

What happens when a customer pays their invoice in AR 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 AR 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 AR financing?

A benefit of accounts receivable finance 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 AR 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.

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 it’s reputable. The last thing a business owner wants is to be put in a bad financial situation if their provider fails. Leaning on trusted advisers, 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

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.

Fundbox offers the fastest accounts receivable financing solution we’ve reviewed. With Fundbox, businesses can get a credit line of up to $100,000 based on the value of outstanding invoices. Fundbox charges as little as 0.5% per week based on the amount drawn. Business owners can apply online in 10 minutes, receive approval within hours, and funded in as soon as one business day.

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