What is Accounts Receivable Financing?

Accounts receivable (AR) financing is a type of financing that leverages the accounts receivables to raise capital for business needs such as money flow, inventory, business expansion, and emergency cash flow infusions. Accounts receivable financing agreements can be structured in multiple ways but usually with the basis as either an asset sale or of those receivables in the form of a business loan or business advance. The most common types of business funding products for accounts receivable financing are Invoice Financing(Factoring), Asset-Based Business Loans (ABL), or Future receivables sale and purchase agreement. As a go-to factoring company, AdvancePoint Capital can help with a wide range of financing options and business loans you can rely on.

What Types of Accounts Receivable Loans are There?

Invoice Financing (also known as Invoice factoring)

Invoice financing (also known as “Accounts Receivable Financing,”) is a type of financing that allows business owners to get AR financing off of outstanding invoices that they would otherwise be waiting for 30, 60 or up to 90 days or more, depending on invoice terms. These invoices cannot be delinquent from the business owner’s customers/clients and must be submitted at the time of consummation of the invoice. This product applies only for businesses that have customers that they invoice on a daily, weekly, or monthly basis consistently.

Asset-Based Loans (ABL)

Asset-based lending are accounts receivable finance option, essentially accounts receivable financing that is secured by collateral. An asset-based loan or line of credit may be secured by accounts receivable, purchase orders, invoices, inventory, Machinery and Equipment, Marketable Securities, Intellectual Property or Commercial Real Estate that the business owner owns. The asset-based lending industry is for business lending only and is not a consumer loan.

Future Receivables Sale and Purchase Agreement

These advance options, also known as a Purchase of Future Sales Agreements, advance a “lump sum” of money upfront to a business owner with a discounted purchase price (also known as specified amount) to payback. This type of business funding is paid back by taking a set percentage of future receivables until the business funding is paid back.

What are the most common uses of Accounts Receivable financing?

  • Cash Flow 
  • Advertising/Marketing
  • Raising capital to expand business
  • Inventory or supplies
  • Emergency cash flow infusions such as emergency relief for accounts receivable issues

The 4 Best Accounts Receivable Financing Options

Invoice Factoring for Accounts Receivable Financing

This type of business financing allows you to get an advance of invoices sent to clients/customers of up to 95% percent of purchase orders or outstanding invoices. An Invoice finance company will advance a set amount of the unpaid invoice based on an invoice advance agreement to the business owner and then collect directly from the client or customer for the unpaid portion.

Product Overview

Rates: Factor Rates 1.50% to 2.75% of invoice amount advanced

Fees: Typically a monthly service management fee based on volumes

Credit Standards: Companies that are invoiced will be business credit vetted, not the business owner engaged in the invoice advance agreement.

Documentation: Low Documentation: 1-page application, accounts receivable aging report, and clients contact information

Benefits and Best Uses of Invoice Financing

Invoice factoring, once set up with the invoice finance company, can provide money in a pinch and allow a company to continue to operate smoothly. In many cases factoring companies now have web-based portals that allow business owners to upload invoices in real-time to get advances deposited in a business bank account. The costs are relatively low compared to the benefits. It’s is a small business lifeline. The main use of invoice advances is for money flow, but there are no restrictions on the use of money.

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Asset-Based Lending (ABL)

Commonly referred to as asset-based loans (ABL), asset-based finance is a form of business lending that relies on the collateral of your business, rather than just money and business credit. Traditional loans look at revenue, financials, and other indicators first, collateral second, while asset-based loan programs look at collateral first and revenue second. This method of financing relies on collateral to provide financing, which allows companies that are growing fast to maintain the money needed to keep up with the growth. While ABL is great for high growth companies, any company that is in distress and needs to recapitalize its balance sheet can utilize asset-based lending. 

What type of collateral is used for Asset-Based Lending?

Asset-backed loans enable companies to utilize a variety of collateral options for security. There is a long list of collateral options that can be used, but for the purposes of this topic, we are going to focus on accounts receivables like purchase orders and invoices. But make no mistake about it, this type of financing will collateralize all business assets if you get an asset-backed business loan. 

What are the best industries for Asset Based Loans?

  • Transportation
  • Manufacturing
  • Staffing Agencies
  • Technology
  • Construction
  • Wholesale B2B (Businesses to Business) Industries

Why would a business use an Asset-Based Loan?

  • Cash Flow stabilization
  • Refinancing Debt
  • Business Expansion
  • Inventory Purchase

What documents are needed to get approved for an Asset-Based Loan?

  • Business Bank Statements
  • Profit and Loss Statement
  • Balance Sheet
  • Account Receivable and Accounts Payable Aging Report
  • Business Tax Returns
  • Debt Schedule
  • Inventory Report

What are Asset-Based Lending rates?

There are a variety of different asset-based lending companies, all of which have different structures, criteria, and rates. Rates for an asset-based loan can range from 5.25% to 15% and can be structured as an asset-backed line or an asset-based term loan. Below is a list of factors that can affect your rate.

Product Overview

Rates: Interest rates start at 0% up to 28.99%

Terms: No term limits, Revolving Line of Credit 

Fees: No Origination Fees

Payments: Low flexible monthly payments

Credit Standards: Good to excellent with deep history

Documentation: True No Doc. One Page Application (larger amount requests may require more documentation)

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Merchant Cash Advance

Merchant Cash Advances, also known as a Purchase of Future Sales Agreements, advance a “lump sum” of money upfront to a business owner with a discounted purchase price (also known as specified amount) to payback. The advance is repaid by taking a fixed percentage of future card sales batches until the payback amount is paid back in full, there is no term limit with advances as the fixed back percentage never changes. 

The time frame to pay back depends on the volumes of future card sales. It’s estimated that Merchant Cash Advances are set up with expectations of being repaid in 6 to 18 months, but again it may be longer or shorter depending on future card sales. The only documentation required for business funding is a one-page application, three months bank statements, and three months of merchant processing statements. No other financial statements required.  

Product Overview

Rates: Factor Rates between 1.15% up to 1.45%

Terms: No term limits estimated payback periods are 6 to 18 months

Fees: Typically 1% to 3% Origination Fees

Payments: Fixed percentage Splits from future card batches

Credit Standards: All types considered from Poor to Excellent

Documentation: Reduced, low Doc. 1-page application, 3 months bank statements, and 3 months merchant processing statements.

Benefits and Best Uses of MCA

These do cost more than traditional bank financing with higher rates and fees, but the flexibility of repayment, which is attached to the fixed percentage of future sales, really helps businesses that fluctuate in sales or are a seasonal business. You couple that with the limited documentation you provide, MCA’s really helps businesses that fluctuate in sales or are a seasonal business. Not all businesses are equal, and sometimes traditional business loan products are not an option for some. There are no limitations for the use of money and can be used for a variety of different purposes, but a majority of money is working capital needs.

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Business Cash Advance (BCAs)

BCAs, also known as a Purchase of Future Sales Agreements, advance a fixed “lump sum” of money with a discounted purchase price, also known as a specified amount, to payback. The advance is repaid by taking a fixed percentage of future overall sales, which is different than an MCA, which takes a percentage of future card sales. Payments are collected by a fixed daily or weekly payment deducted from a business bank account, which is based on the fixed percentage of future sales. 

After every month, if the fixed payments taken are more than the set future percentage of sales, than a refund back to the merchant can occur. This repayment continues until the payback amount is paid back in full. Therefore, there is no term limit with advances as the fixed payback percentage ever changes. The time frame to pay back depends on the volumes of future overall sales. It’s estimated that Business Cash Advances are set up with expectations of being repaid in 6 to 18 months, but again, it may be longer or shorter depending on future card sales. Documentation is limited to 1-page application and three months bank statements. No tax return is required.

Product Overview

Rates: Factor Rates between 1.10% up to 1.45%

Terms: No term limits estimated payback periods are 6 to 18 months

Fees: Typically 1% to 3% Origination Fees

Payments: Fixed ACH payments are weekly or daily Monday-Friday 

Credit Standards: All types from Poor to Excellent is considered

Documentation: Reduced or Low Documentation. 1-page Application, 3 months bank statements

Benefits and Best Uses of a BCA

BCA costs are higher than those of traditional financing, but when credit and documentation are an issue. A BCA can be a real lifesaver. There are no limitations for the use of money and can be used for a variety of different purposes, but a majority of the reasons are working capital to help small business.

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What are the Pros and Cons of Accounts Receivable Financing?

All of the products mentioned provide funding to small businesses with some type of reduced documentation. The benefits of these products allow small business owners who either can’t or won’t provide certain documentation the ability to still get approved for funding for the company from financing companies.

Unfortunately, for those small businesses that don’t invoice customers on a regular basis, this product is not for you, and you will need to look at other options.

Pro’s

  • Reduced to No documentation provided for a decision
  • Speed-Processing times on No-Doc business funding’s are usually one day
  • When you are turndown for financial statements. No-Doc loans offer a solution.

Con’s

  • Rates may be higher than that of traditional loans
  • Fees may cost more than traditional loans
  • Terms may be shorter in duration
  • May not offer some flexibility traditional loans do 
  • Loan Amounts may be limited

Frequently Asked Questions

What are the Benefits of Accounts Receivable financing?

When you are turned down because of documentation, AR financing may be an alternative source to use to avoid business loan declines. The speed in which to get funding for your business can be the same day with account receivable financing. So, when you need the money in an emergency, it might be the best choice.

Are Accounts Receivable Loans Difficult to Obtain?

AR financing and loans are less difficult than traditional loans to get approved for. There are still minimum requirements for AR financing, and they look closely at the credit of the business owner. Another thing to keep in mind, a No-Doc factoring company may have less favorable rates, costs, and terms than that of traditional loans.

Can I qualify for Accounts Receivable financing if I have bad credit?

Yes, you can get approved for business funding with a No-Doc business loan if your score is low. Keep in mind the rates, costs, and terms may be effective by how bad it is in the offer. Invoice financing does not look at business credit at all, so that may be an attractive option if you are that type of company that invoices customers on a regular basis.  

Can I get Accounts Receivable Financing if I am a start-up business?

The short answer is no; you cannot get a start-up business loan without providing documentation. Start-up financing requires a lot of paperwork related to a business plan that includes financial projections that need to be detailed, including balance sheet, profit & loss, and many projections.  

The Bottom Line: Advice, Tips, Warning’s about Accounts Receivable Financing

In recommending accounts financing, it starts with asking the question, why? Traditional loans offer better terms and product options than account receivables financing. So, are you looking at the accounts receivable factors because you were declined based on the documentation? Are you choosing AR financing because you cannot produce the documentation to begin with? Are you experiencing an emergency with your business and don’t have time to produce documentation? 

If the answer is YES to any of three main questions or situations than we would recommend AR financing, if the answer is NO, take the time to look at better business finance opportunities that offer better rates, costs, and terms.

How to Apply for Accounts Receivable Financing?

AdvancePoint Capital offers an easy business loan experience. Our customers love the fast, streamlined process and high approval rates that come from working with us. All scores are considered.

Applying for a loan with AdvancePoint Capital is as simple as a 1, 2, 3, 4 process. Start with this online form, then fill out the short application page, wait a few hours for your approval, and then get your money!

The fast, convenient and straightforward way to get the money you need for your business – now!

Get your Quote Today by filling out our simple form.

 

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* All loans made by either WebBank, an FDIC-insured Utah industrial bank, or Bank of the Internet Federal Bank, an FDIC-insured federally chartered thrift located in California. In connection with the loans, the Banks' underwriting conditions and terms apply.