AR Finance: Accounts Receivables Financing Guide for Small Businesses

AR Finance: Accounts Receivables Financing Guide for Small Businesses

AR Finance: Accounts Receivables Financing Guide for Small Businesses

Advertiser & Editorial Disclosure

Accounts receivable financing is one avenue you might consider in lieu of business loans or credit cards when you need working capital. Also known as AR financing, it can be a quick and convenient way to get cash for your business to help meet short-term financial needs. Just like any other funding option, account receivable financing has both pros and cons. Here’s what you need to know.

Invoice Financing by BlueVine

BlueVine gives small businesses an immediate advance on their outstanding invoices. We help businesses that Learn More

Invoice Financing by Fundbox

Fundbox offers business owners a simple way to fix their cash flow by advancing payments Learn More

What Is Accounts Receivable Financing?

Account receivable financing is a funding option that allows you to leverage your receivables for cash. Essentially, you’re taking the money owed to your business by customers or vendors and using that as collateral to receive financing. This type of financing can add cash to your balance sheet quickly, relieving some of the pressure that goes along with waiting for a customer to pay. 

Here’s how AR financing works in a nutshell:

  • You apply for funding with one or more accounts receivable financing companies.
  • The financing company reviews the value of your outstanding invoices, your business credit history and financials.
  • If you’re approved, the financing company fronts you the working capital you need.
  • You can use the money as you see fit, making payment to the financing company according to the terms it sets until the financing is repaid in full. 

The amount you can borrow depends on the financing company. Some, for example, may cap you at 70% of the value of your receivables. A different lender, on the other hand, might let you borrow up to 100% of your receivables. And lenders can also impose an overall dollar amount limit, such as $100,000 or $1 million. 

With this type of financing, your outstanding invoices remain your responsibility. It’s up to you to collect on what’s owed from your customers for goods or services as those invoices come due. That’s different from accounts receivable factoring. 

Get cash flow insights instantly

Get cash flow insights instantly

Analyze your business cash flow with Nav’s mobile app.

Download now

AR Financing vs. Factoring: What’s the Difference?

Account receivable financing and accounts receivable factoring often get grouped together but they’re not the same thing. With factoring, you sell your invoices to the financing company rather than keeping them on the books. 

The financing company lends you money, based on the value of those invoices and its predetermined limits for factoring advances. At that point, you can use the money as needed but collecting on outstanding accounts receivable is no longer your responsibility. It’s up to the financing company to make sure your customers pay. 

Both accounts receivable financing and factoring entail a fee. With AR financing, the fee may range from 2% to 4% and be charged monthly as part of your regular payment. With factoring, it may range from 3% to 5% and be charged up front. Note that this is a fee, not an annual percentage rate. Depending on the accounts receivable financing terms you agree to, the effective APR could be well into the double-digit range. 

Aside from cost, the biggest thing to keep in mind is whether you’re comfortable with your customers knowing that you’re getting financing to fund your business. If you’d rather keep that information to yourself, then accounts receivable financing–not factoring–may be the better choice. 

Keep in mind that with either one you may need to sign a personal guarantee and/or a validity guarantee. A personal guarantee means you agree to be personally liable for the debt. If the business defaults, you’d still be responsible for paying back what you borrowed. A validity guarantee essentially states that the information you’re providing about your accounts receivable to the financing company is valid and accurate. This guarantee helps the AR financing or factoring company determine how much to lend to you. 

Best Accounts Receivable Financing Companies in 2020

There are a number of companies that offer accounts receivables funding but they aren’t all alike. As with any other type of financing, it’s helpful to do your research first before choosing a company to work with. To make things a little easier, here are two recommendations for the best accounts receivable financing companies if you need AR financing.

Fundbox AR Financing Review

  • Fundbox AR Financing Rates & Fees: Fundbox charges an advance fee starting at 4.66% but there are no origination fees or prepayment penalty. 
  • Fundbox AR Financing Terms: Borrow up to 100% of invoice funds (maximum $100,000) and repay weekly over 12 or 24 weeks. 
  • Fundbox Accounts Receivable Financing Requirements to Qualify: Must have at least three months of operating history, a minimum credit score of 500 and no bankruptcies or liens on your credit report

Fundbox is an invoice factoring company that offers flexible funding for businesses that need a cash flow injection. Perfect credit isn’t a requirement, though you likely won’t be approved if you have a previous bankruptcy. 

With Fundbox, you can get an advance of 100% of your outstanding invoice value, up to $100,000 maximum. You can choose either 12 or 24 weeks to repay the advance and payments are made weekly. 

The minimum advance fee starts at 4.66% but the fee you pay may be higher, based on creditworthiness, the amount of the advance and your business financials. Here’s an example of what you might pay for $100,000 in accounts receivable funding with a 4.66% fee:

12-Week Term
Week Principal Interest Total per week
Weeks 1-4 $7,847.92 $873.75 $8,721.67
Weeks 5-12 $8,576.04 $145.63 $8,721.67

 

24-Week Term
Week Principal Interest Total per week
Weeks 1-8 $3,698.44 $842.81 $4,541.25
Weeks 9-24 $4,400.78 $140.47 $4,541.25

As you can see, you’re paying more in interest during the early part of the repayment term, versus the later. But the weekly payment stays the same, which makes budgeting cash flow easier on a monthly basis. 

Callout: Fundbox requires borrowers to use a supported accounting software program, which includes QuickBooks, Freshbooks, Xero, Harvest and Clio. 

BlueVine AR Financing Review

  • BlueVine AR Financing Rates & Fees: Pay a weekly rate as low as 0.25% with no other fees. 
  • BlueVine AR Financing Terms: Borrow up to 90% of invoice funds up front ($5 million cap) with weekly repayment. 
  • BlueVine Accounts Receivable Financing Requirements to Qualify: Minimum three months in business, $10,000+ in monthly revenue and 530 personal credit score. 

BlueVine offers generous invoice financing terms, allowing businesses to borrow up to $5 million through account receivable factoring. Borrowers pay a weekly factoring fee which can be as low as 0.25% until the advance is paid in full. 

Aside from high borrowing limits, the chief benefits of using BlueVine for accounts receivable financing are the minimum requirements to qualify and funding speed. You only need a 530 personal credit score to qualify, along with $10,000 in monthly revenue and at least three months of operating history. That could make it suited for newer businesses or business owners that have less than perfect credit. 

BlueVine is also fast and it’s possible to receive funding in as little as a few hours or the next business day once you’re approved. That makes it one of the better financing options for accounts receivable funding if you have an emergency cash flow need. 

Callout: In addition to invoice financing, BlueVine also offers term loans and lines of credit qualifying businesses. 

Accounts Receivables Financing and Small Business

If you’re considering account receivables financing for your small business, here’s a handy overview of the different types of financing you could choose from. 

What are the three primary types of receivables finance? 

  1. Asset-based lending

Asset-based lending involves using your assets, i.e. accounts receivable, as collateral for financing. This is the type of AR financing described earlier, in which you keep your assets and leverage them to get working capital. Asset-based lending could make sense if you’d rather not sell your invoices to a lender and you have sufficient cash flow to make weekly payments. 

  1. Traditional factoring

As mentioned previously, factoring involves selling your account receivable invoices to a third-party AR financing company. The advantage here is that you don’t have to deal with collecting those invoices; you simply have to pay the financing company back what you’ve borrowed. But factoring could end up being more expensive than asset-based lending, depending on the up front fee and/or weekly fee and how long it takes you to pay it off. 

  1. Selective receivables finance

With selective receivables financing, you can pick and choose which invoices you’d like to borrow against. This type of financing may carry lower costs than traditional factoring or asset-based lending and it may not show up as debt on your balance sheet. You may choose selective receivables financing if you need to access smaller amounts of working capital or you’d like the option to leave some of your receivables out of the financing equation. 

Alternatives to Invoice Financing Companies

Invoice financing isn’t always the best fit for every business. If you need funding, you may consider one of these business financing options.

  1. Business line of credit

A business line of credit can give you access to a revolving credit line. You open up the credit line and use it to cover business expenses, then free up available credit as you pay it back. Depending on the terms, your line of credit may have a fixed life span or you may be able to leave it open indefinitely. A business line of credit could be useful if you have ongoing working capital needs or fluctuating monthly cash flow. 

  1. Business credit cards

Business credit cards can make covering business purchases such as travel, office supplies, gas or advertising easier. You can charge purchases and pay the balance in full to avoid interest charges or carry a balance over time if needed. Business credit cards may be much easier to qualify for compared to a traditional loan or line of credit. As an added perk, many business credit cards allow you to earn points, miles or cash back on purchases, all of which could save you money. 

  1. SBA loan

A Small Business Administration (SBA) loan could be a good choice if you have excellent credit. SBA 7(a) loans are one of the most popular small business loan options for established businesses that need to borrow up to $5.5 million and want to take several years to pay it back. Note that while SBA loans can offer some of the lowest interest rates, they have more stringent approval requirements and loan funding can take several months. That could make it less than ideal if you need cash sooner rather than later. 

Accounts Receivable Financing: Final Word

AR financing is a funding solution that’s worth considering if you’re interested in getting working capital fast and you don’t have perfect credit. As with any other financing option, it’s important to consider the cost first before you leap, as accounts receivable funding could end up being a more expensive way to borrow. Weighing the benefits of AR financing against the total cost of borrowing can help you decide if it’s a good option. 

You may want to check your business credit rating first to see if you might be able to qualify for a small business financing alternative with more favorable terms. Get your free business credit scores then head to the Nav marketplace to compare lenders. 

Pro tip: What you don’t know can kill your business

Pro tip: What you don’t know can kill your business

Take charge of your financial health today with a FREE Nav account. We'll protect and monitor your personal and business credit, so when it comes time to find financing you're prepared on all fronts.

Sign up now

This article was originally written on February 7, 2020.

Rate This Article

This article currently has 2 ratings with an average of 3 stars.

ABOUT AUTHOR

Connor Wilson

Connor Wilson

Connor Wilson is Nav's Content Manager. With experience in loan underwriting and credit review, he brings a strong desire to help business owners make the best financial decisions possible to every piece he writes and edits.

Have at it! We'd love to hear from you and encourage a lively discussion among our users. Please help us keep our site clean and protect yourself. Refrain from posting overtly promotional content, and avoid disclosing personal information such as bank account or phone numbers.

Reviews Disclosure: The responses below are not provided or commissioned by the credit card, financing and service companies that appear on this site. Responses have not been reviewed, approved or otherwise endorsed by the credit card, financing and service companies and it is not their responsibility to ensure all posts and/or questions are answered.

Leave a Reply

Your email address will not be published. Required fields are marked *