Incoming cash flow is critical to your business. After all, if you donât have money coming in, how are you going to pay for inventory, daily operating expenses, or other costs associated with running your business?
Sometimes, cash flow shortages are due to circumstances beyond your control. A slow season, for example, could leave your bank account a little short. But maybe youâre facing a different challenge. You have plenty of sales, but one big obstacle thatâs obstructing your cash flow: unpaid invoices.
Depending on your companyâs payment terms, you could be stuck waiting for weeks (or even months!) to receive payment from your customers. When these unpaid invoices stack up and your business is strapped for cash, this can quickly become a big problem.
You probably already know about more traditional methods of financing that can help you out of this bind, like lines of credit, credit cards, and small business loans. Sometimes, though, these options just donât make sense. Maybe your personal credit score is low, you donât meet a lenderâs requirements, or you need funding fast.
What you may not know is that thereâs a unique financing option that gives you control of your unpaid accounts. Accounts receivable financing is a way to use your unpaid invoices to get the funds you need in just days. If you have a stack of unpaid invoices sitting on your desk and a bank account thatâs seen better days, read on to learn more about accounts receivable financing and how to put it to work for your business.
BlueVine | Fundbox | P2Bi | InterNex Capital | Riviera Finance | American Receivable | |
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Credit Facility Size | $5K – $5M | Up to $100K | $500K – $10M | Up to $10M | $5K – $2M | Up to $3M |
Average Approval Time | 2 – 7 days | 1 day | 2 weeks | 3 – 7 days | 4 – 7 days | 3 days |
Minimum Credit Score | 530 | N/A | N/A | N/A | N/A | N/A |
Minimum Annual Revenue | $100K | $50K | $500K | $1M | N/A | N/A |
Required Time In Business | 3 months | N/A | 6 months | 2 years | N/A | N/A |
What Is Accounts Receivable Financing?
With accounts receivable financing, you receive the capital you need using your outstanding receivables, typically in the form of unpaid invoices. This is why accounts receivable financing is also known as invoice financing.
There are two common definitions used when talking about accounts receivable financing. The general definition is simply financing based around receivables. Invoice discounting and invoice factoring (more on that a little later) both fall under this umbrella.
More specifically, though, this type of financing uses your accounts receivables as collateral for an asset-backed line of credit. A lender provides you with a line of credit based on the quality and quantity of your unpaid invoices.
For small business owners, this type of financing has many benefits. Since accounts receivable is the qualifying factor, other criteria — such as personal credit score, time in business, and the financial details of your business — are often less important to lenders. If you fail to qualify for other types of funding, accounts receivable financing could help you overcome your financial challenges.
You also wonât have to jump through hoops to get the capital you need (unlike with traditional loans and other types of financing). In most cases, all you need to provide to a lender is basic information about yourself and your business and information about your unpaid receivables. You wonât have to worry about pulling old tax returns or other documentation thatâs required for traditional loans. If you have qualifying invoices, you can be approved for a line of credit with accounts receivable financing.
A/R Financing VS Invoice Factoring
Earlier, we mentioned invoice factoring. This is a type of financing that is slightly different from accounts receivable financing.
Accounts receivable financing provides you with a flexible line of credit that you can draw from as needed. Your invoices arenât sold to the lender. Instead, theyâre used as collateral to secure the line of credit.
With invoice factoring, you sell your unpaid invoices to a lender for immediate payment. Youâll receive a large portion of the invoice amount upfront — think anywhere from 80% to 95% of the invoice total. Once the customer pays the invoice, youâll receive the remaining amount, minus any fees charged by the lender.
Another difference between the two is how payment is collected. When you choose accounts receivable financing, you collect payment from your customers as usual. Your customers will not be notified that you are working with a third party.
With invoice factoring, your lender — also known as a factor — will be responsible for collecting payments from your customers. In most cases, your customers will be notified that a third-party is collecting payments.
Invoice financing is usually best for larger companies with many invoices. Invoice factoring is usually the better choice for small companies that donât have the time or resources to collect payments from customers.
Is invoice factoring best for your business? Learn more about invoice factoring, then compare rates, terms, and requirements of top factors.
Who Qualifies For A/R Financing?
One of the biggest advantages of accounts receivable financing is relaxed borrower requirements. You donât have to worry about having a perfect credit score, a long time in business, or high annual revenues — hard and fast requirements for most other lenders.
Some lenders do have credit score requirements, though. In general, youâll find that the minimum score needed to qualify for accounts receivable financing is much lower than the credit score requirements for loans, unsecured lines of credit, and other financial products.
For most lenders, the number of invoices you have and the creditworthiness of your customers are the most important qualifying factors. During the application process, youâll provide your invoices to the lender to determine if youâre eligible for funding. Some lenders may also look at your business bank statements to assess cash flow.
Most lenders only work with B2B or B2G companies, although some lenders will approve B2C companies with qualifying invoices.
How Accounts Receivable Financing Works
At this point, you should have a better understanding of accounts receivable financing, but you may still be on the fence as to whether itâs right for your business. Letâs explore exactly how accounts receivable financing works so you can determine whether or not to take this financial leap
1. Apply For Financing
Weâll go into detail a little later about how to choose the right lender for your business. For now, though, letâs assume that youâve already selected your lender. Begin by filling out the lenderâs application. Usually, this is a fairly short process that requires some basic information about yourself and your business, such as your federal Employer Identification Number, your full legal name, and contact information.
2. Submit Your Invoices
Once youâve filled out your application, some lenders require you to securely connect your accounting software. This allows the lender to determine if the quantity and quality of your invoices are enough to qualify for financing. Other lenders may require you to simply upload your invoices.
3. Get Approved
Once youâve completed the application and have submitted your invoices, the lender will make an approval decision. The lender will issue a line of credit based on the value of your invoices. Approval decisions may be given the same day, or you may have to wait several days for a decision.
4. Use Your Line Of Credit
Once youâve been approved, you can now make draws from your line of credit to pay for business expenses. Most lenders transfer funds to your banking account immediately after you initiate the draw. In most cases, you should have the funds in your account within 1 to 2 business days.
5. Collect Payments & Repay Your Lender
Youâll continue to collect payment from your customers as usual. As you collect payments on your invoices, youâll repay any funds youâve taken from your line of credit, as well as any fees charged by the lender.
Typical A/R Financing Rates & Fees
The rates and fees charged by a financer will vary based on a number of factors. Youâll qualify for lower rates if youâre in a low-risk industry, have multiple invoices with creditworthy customers, and bring in steady cash flow.
On average, expect to pay about 3% to 5% each month on the portion of used funds. Some lenders may offer rates as low as 1%, which is why itâs important to shop around for the best rate. This also highlights why itâs so important to get payments from customers as quickly as possible. The longer you have an outstanding balance with your financer, the more you end up paying.
You may also be required to pay additional fees based on the lender you select. Some of the most common fees that you may encounter include:
- Servicing Fees
- Application Fees
- Setup Fees
- Withdrawal Fees
- Processing Fees
How To Choose The Right A/R Financer For Your Business
If youâve decided to move forward with accounts receivable financing, the next step is to find the right financer for your business. What works for one business may not work for yours, so make sure to do your research and apply the following tips when making your selection.
- Understand & Meet All Requirements: Know what the lender requires before you even apply. While accounts receivable financing may be easier to obtain than other types of funding, some lenders have stricter requirements. Make sure that you meet all of these requirements. If the lender requires a minimum credit score, check your score for free online to make sure youâre a good fit. Also pay attention to annual revenues, minimum time in business, excluded industries, and other requirements.
- Review Total Cost Of Borrowing: Sure, one lenderâs monthly rate is low, but add in fees and other costs and you may end up paying much more. Make sure to look at the numbers — all of them — to calculate the most affordable financial solution.
- Consider Borrowing Limits: Assess the borrowing limits of each lender. For example, if a lender only issues lines of credit up to $50,000, but youâd prefer to have a higher line, you can immediately eliminate this lender from your list.
Recommended A/R Financers
With an idea of what to look for in an accounts receivable financer, youâre one step closer to scoring the funding you need for your business. Maybe youâve even started your search, but thousands of search engine results have your head reeling. To cut through the clutter and get you started, check out our recommended options for accounts receivable financers.
BlueVine | Fundbox | P2Bi | InterNex Capital | Riviera Finance | American Receivable | |
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Credit Facility Size | $5K – $5M | Up to $100K | $500K – $10M | Up to $10M | $5K – $2M | Up to $3M |
Average Approval Time | 2 – 7 days | 1 day | 2 weeks | 3 – 7 days | 4 – 7 days | 3 days |
Minimum Credit Score | 530 | N/A | N/A | N/A | N/A | N/A |
Minimum Annual Revenue | $100K | $50K | $500K | $1M | N/A | N/A |
Required Time In Business | 3 months | N/A | 6 months | 2 years | N/A | N/A |
BlueVine
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Through BlueVine, you can apply for accounts receivable financing lines up to $5 million. Rates begin at just 0.25% per week, and you can be approved as quickly as 24 hours after applying.
The application process is easy. Filling out the application takes less than 10 minutes. Once your application is reviewed, youâll receive a decision from BlueVine. If approved, you can sync invoices from your supported accounting software, or you can upload invoices right to your dashboard. Youâll receive up to 90% of the invoice amount up front, and youâll receive the rest (minus fees) after the customer pays. You select the invoices to submit, and there are no long-term contracts.
To qualify, you must operate a B2B company. You must have a minimum FICO score of 530, have $100,000 in annual revenue, and be in business for at least 3 months. If you need additional funding options, BlueVine also offers business lines of credit.
Fundbox
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Through Fundbox, you can receive up to $100,000 with accounts receivable financing. Advance fees start at 4.66% and repayments are weekly. One thing that sets Fundbox apart is that you can get 100% of your invoice value deposited into your bank account.
Registering with Fundbox couldnât be easier. Thereâs no credit check and no paperwork requirements. All you have to do is link your accounting software, and you can receive approval in just hours. Once youâve been approved, funds can be transferred to your checking account as quickly as the next business day.
To qualify, you must use a Fundbox-supported accounting or invoicing software. Your business must be based in the U.S. and have annual revenue of at least $50,000.
P2Bi
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Through P2Binvestor, you can receive an asset-backed line of credit up to $10 million. Through this lender, you can draw up to 80% of the value of your receivables.
There are several fees associated with a P2Bi line of credit. This includes a one-time origination fee equal to 1.5% of your credit line, an annual renewal fee of 1.5% of your credit line, and a daily discount cost. Annual rates average 8% to 20%.
To qualify, you must be in business for at least 6 months and have annual revenue of $500,000. You must also run a B2B business based in the U.S. There are no minimum credit score requirements, although personal credit is evaluated during the underwriting process.
InterNex Capital
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InterNex Capital provides asset-backed lines of credit from $250,000 to $10 million for qualified borrowers. Rates are between 7.99% and 18.99%. All lines of credit come with 12-month terms with the option to renew.
After filling out the application, youâll receive an approval decision within 3 business days. Once youâve accepted your revolving line of credit, you can make your first draw immediately.
InterNex Capital is more suited for large businesses. To qualify, you must have annual revenue of at least $1 million. There are no minimum credit scores required to qualify, but you must be in business for at least 2 years. InterNex Capital charges fees including an origination fee, draw fee, unused line fee, and renewal fee.
Riviera Finance
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When you work with Riviera Finance, it’s possible to get up to $2 million for your outstanding receivables. You can receive up to 95% of your invoice value within 24 hours after products have been accepted by your customers. Rates start at 2%. Standard terms are 6 months, but the company works with borrowers if different terms are needed.
Riviera Finance works with businesses in all 50 states. There are no annual revenue, personal credit score, or time in business requirements to qualify.
American Receivable
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With American Receivable, you can receive funding up to $3 million for your unpaid invoices. This company will provide up to 90% of the value of your invoices within 24 hours after submission. Rates start at just 0.8% per month.
To qualify, you must have qualifying invoices to creditworthy customers. There are no time in business, credit score, or revenue requirements.
Final Thoughts
If you deal with a lot of accounts receivable and you donât qualify for other types of business financing, accounts receivable financing could be a smart next step for your business. Of course, this financial solution isnât for everyone.
Weigh out the total costs of accounts receivable financing and evaluate the needs of your business. You may find that this type of financing is right for you, or you may choose another source of funding such as a business line of credit or business credit card. Regardless of what path you take, make sure that any financing you accept is financially feasible and will be used to better your business.
BlueVine | Fundbox | P2Bi | InterNex Capital | Riviera Finance | American Receivable | |
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Credit Facility Size | $5K – $5M | Up to $100K | $500K – $10M | Up to $10M | $5K – $2M | Up to $3M |
Average Approval Time | 2 – 7 days | 1 day | 2 weeks | 3 – 7 days | 4 – 7 days | 3 days |
Minimum Credit Score | 530 | N/A | N/A | N/A | N/A | N/A |
Minimum Annual Revenue | $100K | $50K | $500K | $1M | N/A | N/A |
Required Time In Business | 3 months | N/A | 6 months | 2 years | N/A | N/A |
The post Accounts Receivable Financing: What You Need To Know appeared first on Merchant Maverick.
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