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How to Get Accounts Receivable Financing

By on May 27, 2022 4 min read

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How to Get Accounts Receivable Financing

When you run a small business, it can be frustrating to have customers who don’t pay their bills on time. Having a lot of unpaid receivables can undermine your working capital, making it hard to pay for necessary expenses like payroll and loan repayments. 

In the worst cases, you may find your company struggling to retain its employees or have enough money to keep the lights on.

However, there are solutions available for companies that need to collect funds from their customers for working capital purposes. A few include accounts receivable financing and factoring.

What Is Accounts Receivable Financing?

Accounts receivable financing allows you to obtain funding through your company’s unpaid invoices to get the money you need for working capital. A bank or similar lender will provide you with a line of credit that is established based on your outstanding receivable invoices. 

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Factoring is another type of invoice financing. Factoring involves the outright purchase of your invoices by a factoring company in exchange for a cash advance.

Imagine that your company has $1,000,000 in outstanding customer invoices due within 30 days. You work with an accounts receivable lender who agrees to provide you with a loan for 70% of the value of your receivables, or $700,000. 

You can use that money for working capital, and as collections are received from your customers, you pay the money back to the lender. 

What Is the Difference Between Factoring and Accounts Receivable Financing?

The main difference between factoring and accounts receivable financing is that factoring involves the actual sale of open accounts receivable invoices to a company in exchange for an upfront cash advance. 

Typically, a factoring agreement allows the company to receive up to 80% of an invoice’s value, although this may vary depending on the factoring company. 

The factoring company handles collections activity on the company’s behalf. Once the full value of the invoice is collected, the factoring company will provide the company with the remaining balance of the invoice, less a predetermined service fee.

Under an accounts receivable financing arrangement, the company works with a lender, usually a bank, to obtain a loan based on outstanding accounts receivable. The loan may also include other items as collateral, such as inventory or equipment. 

The company may use the loan for working capital purposes. Once the value of the open receivables is collected, the company repays the lender the principal amount borrowed, plus interest. 

Accounts receivable financing can be a revolving process where the company borrows additional amounts as new sales are made. Companies that choose to undergo a factoring arrangement may also obtain cash advances based on new invoices. 

Is Accounts Receivable Lending Right for Your Business?

Accounts receivable financing is best for companies with limited working capital whose customers are other businesses. It’s a commonly used type of financing in specific industries with long billing cycles. 

Other companies that may find accounts receivable lending helpful include those that need funding to rapidly expand or have customers who pay slowly, in 90 days or longer. 

Companies that don’t have many invoices or those with severely delinquent accounts are not the best suited for accounts receivable financing. This type of lending is not meant to act as a form of debt collection, so it shouldn’t be treated as such.

Before engaging with an accounts receivable lending partner, it’s essential to determine why you need the funding and if it would be more appropriately obtained through other sources, such as a traditional commercial loan or business line of credit.

In some cases, accounts receivable financing may be the only source available, especially when a company has poor credit or has not been in business very long.

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Benefits of Accounts Receivable Lending

There are a few benefits to accounts receivable lending. These include:

Financing for Operations

In some cases, companies may need financing to have the money necessary to purchase materials or inventory. In other cases, an investment in certain capital may be required before the business can realize returns. Accounts receivable financing can provide companies with the money they need to continue their operations.

Cash Flow Stability

At times, business sales can slow, leaving a company lacking cash to fund necessary expenses. Accounts receivable can enhance cash flow and ensure greater stability for companies with cyclical or seasonal sales patterns. 

Immediate Funding

Typically, a company can obtain funding for expenses through accounts receivable lending in a much quicker time frame than other business loans. For example, while an SBA loan may take months to qualify for, accounts receivable financing typically provides funds within several days. 

Drawbacks of Accounts Receivable Lending

The disadvantages of accounts receivable lending include:

Higher Costs

If you decide to take out a loan on your company’s outstanding accounts receivable balance, it may come at a higher cost than other lending options. On top of any service and interest fees your accounts receivable lender charges, you’ll also be responsible for paying back amounts that customers default on.

Long Contracts

Most accounts receivable lenders have extended contracts with their customers. This can be a hindrance when the company wishes to stop the accounts receivable financing process and pursue its collection activities. 

When deciding to use accounts receivable financing for your business, make sure you understand the terms and conditions before signing a contract.

Accounts Receivable Financing Options

To qualify for accounts receivable financing, your company must meet specific requirements. Generally, your company’s credit isn’t a big factor, but your customers are. 

When choosing which invoices you wish to include in your accounts receivable financing agreement, make sure you choose trustworthy clients and have a strong record of paying on time. Otherwise, it may be more challenging to qualify for the loan. 

To be eligible for accounts receivable financing, you won’t need to promise any collateral unless you want to obtain capital worth more than the value of your invoices. This is a significant benefit of using accounts receivable as a funding method. 

How to Get an Accounts Receivable Loan

To obtain an accounts receivable loan, the first step you need to take is determining how much money you need. Review the open invoices you have and select only the ones from the most reputable customers. This can increase your chances of approval and protect you from problems down the road.

Next, you’ll need to gather the necessary documentation to apply. This documentation usually consists of your current accounts payable and accounts receivable report and business information such as your license, recent tax returns, and bank statements. Requirements vary depending on the lender you choose.

Finally, submit your application. The time frame to secure funding will depend on your lender, but most can provide money within a week.

When looking for a lender, make sure to find one that suits your purposes. Fundid Capital is an excellent option for companies seeking working capital funding. It offers both term loans and lines of credit from numerous providers. While traditional lenders may require a good deal of documentation and take time for approval, it’s not unusual to obtain the funding you need through Fundid within a few days.

Get the Capital You Need to Grow

Funding is necessary for business operations. Using it wisely can help companies scale their growth and smooth cash flow issues. 

If you need funding to grow your business, learn more about Fundid Capital to find out how you can get capital to grow faster.

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About Fundid

Fundid is driven by a mission to empower business owners on their growth journeys by simplifying business finance & access to capital. 

We spend our time thinking about what the world would look like if the 80% of businesses that have under 10 employees had access to the capital they needed to grow and thrive. We're solving this with our Business Capital, Business Building Card, and Resources that include our business Grant Match Program.

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