What is Account Receivable Financing: Everything to Know
Every business owner deals with financial problems and stress, but what if there was something other than a loan to help? We are here to tell you that sometimes a loan isn’t the answer you’re looking for but accounts receivable financing is. If you have a decent amount of unpaid invoices this is the best option for your business. To learn more about accounts receivable financing and how it will help your business, check out our guide below.
Accounts receivable financing is asset-based financing that helps business owners to access capital that is withheld by outstanding invoices. This option helps business owners to finance slow-paying invoices.
A business owner will sell its accounts receivable to a company, or lender, that will give them short-term business funding in return. This is a great alternative to taking out a loan and will help to secure working capital.
Accounts receivable financing will help to free up cash that is being held by unpaid invoices. You can look at it as a great tool to help businesses, especially small businesses, manage money.
With this financial option, you will be able to pay employees, invest in the growth of your business, and pay suppliers. If customers are slow payers, this will be the best choice for your growing company.
Keep in mind that most accounts receivable financing are based on recourse financing. This means that you are responsible for all clients paying their invoices.
There are financing companies that will take over your collections and open a line of communication with the client. This will include all follow-ups for payment and working out a payment plan.
If your business cannot meet seasonal demands, would like to seize a business opportunity, or wants to hire additional employees, this finial option can help. Now that you know about what accounts receivable loans can be used for, it’s time to see if you qualify for it.
A big positive to account receivable funding is that it’s easier to get than a business loan. If you did not qualify for a loan or are looking for alternative options this financing is it.
You may be asking why it’s easier to get this type of help than a loan. This is due to the lenders looking at the quality of your invoices and not your personal financial information.
Your invoices will be used as collateral for the lender. They will determine the amount of your financing based on the quality of outstanding invoices. They will also look at the age and amount of invoices you have at the time of your application.
After looking at invoices, the lender will decide if your loan is approved. Interest rates will be determined on how fast they can close out all outstanding invoice payments.
To qualify for AR finance you must be a B2G or B2B business that invoices clients. Your business must be at least 6 months old and have $50,000 or more in business revenue.
Of course, to qualify you must have outstanding invoices because this isn’t a loan. Your customers must also be creditworthy. This is determined by your lender in regards to if they believe the client will pay them back.
The lender will look to see if a client has any challenging funding situations. This can relate to a client having issues with the IRS or even being a start-up.
You have decided that accounts receivable financing is perfect for your business. After researching lenders it will be time to begin your application, but what will you need?
You must have the credit quality of your clients along with a receivable aging report. If there are any liens on your receivables these must also be reported to the lender. You must also provide proof stating that your corporate taxes are up to date.
Of course, you will have to submit all your outstanding invoices so the lender knows what they will be dealing with. As for personal information, you and all business owners must provide a drivers license and personal information.
Bank statements and a voided business check will also come in handy. Some lenders will ask for all these items, others will only ask for a few. It’s not a bad idea to have all your information together and to be prepared.
You have researched lenders and found one that is right for you and your business. Now it’s time to begin your application.
Before starting check the lender’s minimum qualifications. This is good to do before the application process so you can see if your business will be approved.
Before the application process, the lender should give you a list of what will be asked. Because you already pulled all your information you will be prepared for this step, but it doesn’t hurt to double-check and make sure you have everything that’s required.
Most lenders have online portals for their applications. This makes it easy to apply, check the status of your application, and get notified instantly when you’re approved.
If your lender is fully digital, they will have an online portal that can be used after you’re approved. This will help you keep personal track of paid, unpaid, and financed invoices.
Usually, it takes minutes to apply. In a few business days, the lender should respond to your application with a decision.
You submitted your application and were approved, now what?
The lender should give you an advanced portion of the uncollected receivables. This amount will depend on the lender and how many outstanding invoices you have. Ultimately this is based on the lender and the creditworthiness of your clients.
Now your customers will deal with the lender when it comes to their statements. Keep in mind that it’s your responsibility to inform clients of the new billing address.
Once a client has paid their invoice, the lender will keep a portion and then send the payment to you!
If you’re still not convinced that accounts receivable financing is the best option for your business, we have put together the pros of using the service.
When you apply and get approved the lender will not ask for any collateral. This means they will not ask for any assets or guarantors to secure your accounts receivable financing.
With this finical option, you will retain full ownership of your business. It does not require you to give up any part of your business to acquire the funds.
If you really like a company and find yourself in the same boat a few years down the road, you will not need to reapply. This makes the process very easy since you will just need to contact the lender and submit some paperwork.
Like anything, there are downsides to accounts receivable financing. So you won’t be surprised, we have outlined the cons that come with this finical option.
Since this is a quick option for accessing funds for your business, it doesn’t come with a cheap price tag. Accounts receivable financing can have higher interest rates than business loans that can be taken out at your bank.
Be smart, you don’t want to lose money!
Some accounts receivable financing contracts are short, ending when the invoices are paid. Others can be long and last for months. It’s important to read each contract and know what you’re getting yourself into.
The lender has to make money, and if they don’t charge interest they will bill you weekly. For every unpaid invoice, you will get a bill until the client pays in full.
Even though you’re giving your invoices to the lender, they are still your responsibility. If a client doesn’t pay it will come back to you.
We have discussed what accounts receivable financing is and how to qualify. If you have decided this is the right decision for your business then it’s time to apply.
For more finical information be sure to check out the rest of our website.