If you need immediate access to capital but can’t wait for customers to pay their invoices, accounts receivable financing might be a great option to help you get quick liquidity.
As opposed to other types of traditional loans, which are typically based on the overall creditworthiness of your business, this type of financing is based on the value of your company’s accounts receivable, i.e. the invoices due to be paid by customers.
In this case, the creditworthiness of the customers who owe you money is more important than your financial status because you are selling their outstanding invoices as assets.
To help you get a better idea of this type of financing, National Business Capital has prepared this comprehensive guide on the main advantages of accounts receivable financing, how it works, and how it differs from traditional loans.
What Is Accounts Receivable Financing, And How Does It Work?
Accounts receivable financing — which is sometimes referred to as factoring — is a type of asset-based funding in which you use outstanding invoices (or any other receivables) as collateral.
In return, you receive a lump sum that is less than the total amount owed — usually around 70 to 90 percent, depending on the lender and the specific details of the financing agreement.
When an invoice becomes due, your customer pays the lender directly. The lender keeps an agreed-upon portion to cover principal, interest, and fees. Any remaining amount is sent to you.
This type of financing allows you to receive a significant portion of the invoice value upfront instead of waiting for customer payments according to the usual credit terms – which can be up to 90 days.
What Are The Advantages of Accounts Receivable Financing?
There are multiple advantages of accounts receivable financing, including:
Reduction of Risk
Among the main advantages of accounts receivable financing is risk reduction for you as a borrower. That’s because the lender assumes all of the default risk associated with the accounts receivables.
As such, if any of your customers do not pay (in full and/or on time), you are not responsible for collections or exposed to potential losses. However, you will be able to see which of your customers has paid and which hasn’t (typically through a web dashboard or reports provided to you by your lender).
Fast Application & Processing Time
Next on our list of advantages of accounts receivable financing is the fast application and processing time associated with this type of funding, especially if you are applying with a Specialty Finance Group such as National Business Capital.
Whereas banks can take several weeks or months to evaluate a loan application — and still may not approve it — getting funds via accounts receivable financing usually takes a matter of days.
This can enable you to take advantage of volume or early payment discounts on supplies, equipment, inventory, and so on. It is also ideal for covering temporary cash flow shortfalls due to seasonal demand variations.
With NBC, you can access cash of up to $5 million at 90%+ of the value of your aging A/R or outstanding receivables. Funding can arrive as fast as 5 business days!
No Additional Debt
One of the most underestimated but very beneficial advantages of accounts receivable financing is the fact that it doesn’t add to your business’ debt load. Since it’s not precisely a loan but an asset sale, there is nothing for you to pay back.
Unlike conventional business loans, you don’t have to create and commit to a repayment schedule. You get the agreed-upon funding up-front, and it’s up to the lender to take care of all administration.
Flexible Financing
Speaking of the advantages of accounts receivable financing, it’s also important to mention the flexibility of this type of funding.
The amount of financing can grow along with the company’s sales. More sales mean more receivables that can be financed, which is not always the case with fixed credit limits typical in other forms of lending.
In addition, you do not need to use all of your outstanding invoices to obtain funding. You can use a portion in order to get the working capital that you need (e.g., $50,000) and then, if necessary, use additional invoices in the future if more is required (e.g., another $50,000).
When Can I Benefit From Accounts Receivable Financing?
There are multiple situations in which accounts receivable financing can be a great funding option for your business.
You Need Immediate Cash For Daily Operations
If you need quick access to capital to manage daily operations, cover payroll, or pay suppliers, this type of financing can be a quick and convenient solution instead of waiting for customers to pay their invoices.
Example: You are a small tech company that provides email marketing software to your customers with a standard payment term of 90 days. You need to hire more developers, but you lack the funds to do it. By using accounts receivable financing, you can convert your outstanding invoices into cash and hire staff without disruptions.
You Want To Invest In New Projects
If you are looking to expand or invest in new projects, one key advantage of accounts receivable financing is that it provides you with quick access to cash without diluting equity, or taking on additional long-term debt.
Example: You are a manufacturer that has the opportunity to expand production capacity by renting out a new facility. However, it requires a significant investment upfront – an amount that you don’t have. By using accounts receivable financing, you can unlock the cash tied up in invoices and begin your expansion project without waiting.
You Need To Meet Seasonal Demand Fluctuations
If you are a business that often experiences seasonal sales fluctuations – for example, a Christmas shop or a beach restaurant – you may find it difficult to manage inventory or meet staffing needs ahead of peak periods.
Example: You own a small Christmas-themed shop in New York, and you always see an increase in purchases in December. To prepare, you need to order inventory in the fall, when cash flow is typically lower.
By leveraging the advantages of accounts receivable financing, you can obtain sufficient funds to purchase inventory ahead of the peak season.
You Want To Benefit From Supplier Discounts
Many companies in the retail industry can benefit from supplier discounts if they purchase in bulk, pay early, or have established a long-term commitment with the supplier. Accounts receivable financing is a great way to take advantage of these opportunities.
Example: You are a construction company that receives a discount offer from a supplier for the bulk purchase of materials. However, you can only take advantage of this discount for the next week. By leveraging the advantages of accounts receivable accounting, you can get quick access to cash and reduce your costs by taking advantage of the account.
You Don’t Qualify For Traditional Bank Loans
If you are a small business or a startup, you may have difficulties qualifying for traditional bank loans due to a lack of credit history or other issues. In such cases, you may find accounts receivable financing a viable alternative since the invoices secure it and doesn’t depend as much on your creditworthiness.
Example: You started your own Marketing agency a few months ago, but it has not yet built a strong credit history, and you are having trouble securing a traditional bank loan. By reaping the advantages of accounts receivable financing, you gain immediate funding, and you can continue your operations without the need for conventional loan approval.
Is Accounts Receivable Financing Right for Your Business?
Accounts receivable financing may be a suitable funding solution for your business if you have a significant amount of money tied up in outstanding invoices, want or need rapid access to a lump sum of working capital, and want to focus on running your business vs. handling loan administration tasks.
Conversely, it may not be the right solution if you do not have sufficient outstanding invoices to cover all/most of your working capital needs or if you do not have an immediate or short-term use for funds (in which case, applying for a business line of credit that you can draw down as needed may be a better option).
Qualifying For Accounts Receivable Financing With NBC
If you want to qualify for accounts receivable financing, look no further than National Business Capital. With $2+ billion financed since 2007, multiple awards, and an experienced team of Business Finance Advisors, we have everything you need to find the best financing options for your project.
Are you ready to get started? Apply here.
Frequently Asked Questions
Whether your customers know about accounts receivable financing depends on the type of arrangement. In invoice factoring, customers are typically aware as the factor collects payments directly from them.
In invoice discounting, the process is usually confidential, and you continue to manage collections, so customers might not be aware.
To qualify for accounts receivable financing, invoices must be from creditworthy customers, free of liens, and typically due within 90 days. They should be for completed work or delivered goods to ensure they’re undisputed.
Some lenders may require a minimum invoice amount and may not accept invoices that are too small or from customers they deem risky.
Accounts receivable financing is not considered a traditional loan. Instead, it’s a form of asset-based financing where invoices are sold or used as collateral to get immediate cash.
This means it doesn’t add debt to your balance sheet, which can be beneficial for maintaining a cleaner financial profile and possibly making it easier to secure other types of financing in the future.
If your customer doesn’t pay their invoice, the responsibility depends on the financing agreement. In non-recourse factoring, the lender absorbs the loss. In resource factoring, you must buy back the unpaid invoice or replace it with a new one, typically bearing the cost of the default.
Using accounts receivable financing can affect customer relationships depending on how it’s managed. If the process is transparent and professionally handled, especially in terms of collection practices, the impact can be minimal.
However, if customers feel pressured or mistreated by aggressive collection tactics, it could strain relationships.
ABOUT THE AUTHOR
Joe Camberato is the CEO and Founder of National Business Capital. Beginning in 2007 out of a spare bedroom, Joe and his team have financed $2+ billion through more than 27,000 transactions for businesses nationwide. He’s made it his calling to deliver the educational and financial resources businesses need to thrive.