What is Accounts Receivable Financing?
Accounts receivable (AR) financing is a form of funding that leverages the accounts receivables to raise capital for company needs such as operating capital, inventory, expansion, and emergency cash flow infusions. Accounts receivables 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 small business loan or advance. The most common types of funding products for financing, accounts receivable 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 options and business loans you can rely on. Our seamless user experience puts the power of funds in your hands so that you can manage cash flow problems, expansion, growth, and beyond.
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 to businesses that have customers that they invoice on a daily, weekly, or monthly basis with receivables to collect consistently — but can be a great business to business solution.
Asset-Based Loans (ABL)
Asset-based lending is 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 company 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 capital upfront with a discounted purchase price (also known as specified amount) to payback. This form of funding is paid back by taking a set percentage of future receivables until the funding is paid back. These receivables or assets can be unpaid invoices, too.
What Are the Most Common Uses of Accounts Receivable Financing?
- Cash Flow
- Raising capital to expand
- 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 financing agreement and then collect directly from the client or customer for the unpaid portion. Unpaid invoices can be a huge burden on overall success — but we offer access to cash that can help you leverage outstanding invoices to achieve your goals.
What Are Asset-Based Lending Rates?
Rates: Factor Rate of 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 credit vetted, not the business 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 funds 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 operating capital, but there are no restrictions on the use of funds.
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 company, rather than just finances and business credit. Traditional options look at revenue, financials, and other indicators first, collateral second, while asset-based loan programs look at collateral first and revenue second. This method relies on collateral (receivables) to provide financing options, which allows companies that are growing fast to maintain the finances needed to keep up with the growth. While ABL is great for high growth companies with outstanding receivables from its clients, 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 assets that can be used, but for the purposes of this topic, we are going to focus on the example of accounts receivables like purchase orders and invoices. But make no mistake about it, this will collateralize all business assets if you get an asset-backed business loan.
What Are the Best Industries for ABLs?
- Staffing Agencies
- Wholesale B2B (Businesses to Business) Industries
Why Would a Business Use an Asset-Based Loan?
- Cash Flow shortages
- Refinancing Debt
- 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, customer bases, and financing 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 regarding your assets and such that can affect your rate.
Rates: Interest rates start at 0% up to 28.99%
Terms: No term limits, Revolving business Line of Credit
Fees: No Origination Fees
Payments: Low flexible monthly payments
Credit Standards: Good to excellent with deep history
Documentation: True No Doc. Easy Application (larger amount requests may require more documentation)
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. Unlike accounts receivables, an MCA utilizes incoming daily sales. 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 funding is a simple application process, three months of bank statements, and three months of merchant processing statements. No other financial statements required.
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 a traditional bank product 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 companies that fluctuate in sales or are a seasonal business. Not every borrower is equal, and sometimes traditional business loan products are not a choice for some. There are no limitations for the use of this advance product and can be used for a variety of different purposes, but a majority is working capital needs.
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, then 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 quick application and three months bank statements. No tax return is required.
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 traditional alternatives 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 businesses.
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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 for payment on a regular basis, this product is not for you, and you will need to look at other options.
- 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.
- Rates may be higher than traditional options
- Fees may cost more than traditional options
- Terms may be shorter in duration
- May not offer as much flexibility
- 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 may be an alternative source to use to avoid business loan declines. The speed at which to get funding for your company can be the same day as account receivable financing. So, when you need the money in an emergency, it might be the best choice. While short term solutions can also be a great option for financing in a pinch, AR financing offers simple funds fast.
Are Accounts Receivable Loans Difficult to Obtain?
AR financing may be less difficult than traditional products to get approved for. There are still minimum requirements for AR financing like invoice financing, and they look closely at the credit of the business owner. Another thing to keep in mind, a No-Doc financing company may have less favorable rates, costs, and terms than a traditional loan — so check with the factoring company to be certain.
Can I qualify for Accounts Receivable financing if I have a bad credit rating?
Yes, you can get approved for capital in factoring, accounts receivable has No-Doc business loan solutions if your score is low. Keep in mind the rates, costs, and terms may be effective by how bad it is in the offer, similar to short term loans or other financing products. Your business may have poor credit, and invoice financing does not look at business credit at all, so that could be an attractive choice 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?
At face value, the answer is no; you cannot get a start-up business loan without providing documentation to lending institutions. 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. Lenders need to know that you’re able to make each payment on time, and without a sufficient company history, this can be difficult to achieve. However, there are factoring companies that may work with smaller startups, so this can be a great solution. When dealing with a factoring company, just make sure you can handle the factoring fees before signing on any lines.
The Bottom Line: Advice, Tips, Warning’s About Accounts Receivable Financing
In recommending accounts financing, it starts with asking the question, why? Traditional loan solutions offer better repayment 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 because you cannot produce the documentation to begin with? Are you experiencing an emergency with your company and don’t have time to produce documentation?
If the answer is YES to any of three main questions or situations then we would recommend utilizing receivables for financing now, 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, wait a few hours for your approval, and then get your money!
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