AR Financing: How Accounts Receivable Financing Can Help Your Business

Posted at February 4, 2020 » By : » Categories : Business Funding »
AR financing

There’s no single reason why businesses run out of funding when they are looking to grow, but answers can often be found by looking at their accounts receivable report. When a business is trying to grow, AR financing can help increase cash flow based on the amount of unpaid invoices due from its clients.

Here’s everything you need to know about how AR financing can benefit a growing business that is running into cash flow issues.

What AR Financing Brings to Small Businesses

The way that businesses have been funded for the last 50 years wasn’t working for a lot of small business owners. That’s why credit cards and business loans have been replaced with other types of micro-business financing.

For many small businesses, this kind of financing is out of reach. They can’t access the kind of credit that other more established businesses can.

However, small businesses need to acquire financing just like any other business does. They also need to watch out for cash flow problems like any other business. That’s where accounts receivable financing comes in.

Business owners often use their accounts receivable as a way to finance their business. It’s important for them to keep an eye on their accounts payable as well as their accounts receivable.

If a small business owner is looking for AR funding, they need to make sure that their receivables and payables are in good shape, prior to seeking an AR financing lender.

Selling Assets or Getting a Loan

There are a lot of ways for AR financing to help small businesses. There are a few different structures to AR financing and it’s vital to know how things are set up because it can impact how your loan is paid back to the lender.

When you look at your accounts receivable aging report, you’ll likely see a lot of invoices that are either current or past due. Regardless of how old an invoice is, it is due to your business from your customer.

These unpaid invoices may not seem liquid or immediately accessible to you now, but they’re still considered assets.  Your current assets, such as accounts receivable are considered to be part of your liquid assets, and can be turned into cash with  AR funding.

Asset sales are when you sell your company’s assets to another company. With AR financing, the invoices that your customers owe to your business are sold to another company (a lender) in return for cash. Your lender is only going to pay you a percentage of the invoiced amount.

You can now use this cash for running your business, bidding on contracts, or getting caught up on accounts payable. You no longer have to worry about when and if your customers are going to pay their invoices. The lender is also responsible for managing collections on these invoices.

There’s also the potential to structure your AR funding as a loan. Your accounts receivable plays a role because it’s the collateral being used to secure the loan. While your business retains ownership of the invoice, and you must still collect what’s due, you get the funding you need now.

How the Date of Your Invoice Affects AR Financing

Time is of the essence when it comes to invoicing your customers. The invoice dates and due dates are elements that comes into play when it comes to AR financing. These are factors that a lender will look at when determining whether or not they will purchase your receivables.

Invoices are typically paid within 60 days, or sometimes unfortunately up to 90 days, and beyond. A lender who is going to advance you funds off your aging report will want to fund the newer invoices over older ones. Older invoices are considered riskier than newer invoices.

In addition to advancing you funds on the newer invoices, a lender will also advance on the older invoices. This is where the due date comes into play. A lender will almost always consider past due invoices as something they will not advance you funds on.

The Length of the Accounts Receivable Financing Agreement

The length of your AR financing agreement will make a difference when it comes to the kind of funding you get and how much it’ll cost. Your agreement may be for a few months, one year, or up to several years. The term is always agreed upon prior to the first funding.

A short-term funding agreement might be based on a higher interest rate as opposed to a long-term funding agreement. This is because the lender has a shorter period of time to recoup its underwriting costs before it can begin making a profit.

However, a long-term funding agreement is usually the better option because of the lower interest rates. It depends on how quickly you need cash and for how long you want to take advantage of AR funding.

AR Funding and the Terms of the Loan Agreement

There are a few major terms to keep in mind when it comes to an AR financing loan agreement. There is recourse, non-recourse, advanced amount, and reserve account. These terms are always defined and included within AR financing loan agreements.

Recourse means you are responsible for paying the lender back for any invoices it purchased that do not get paid. Non-recourse is just the opposite, any invoice the lender purchases, it assumes all of the risk on whether it’s paid or not.

Advanced amount is the percentage of an invoice that the lender has agreed to advance to you. The advanced amount typically ranges from 80% to 95%, it just depends on the lender you are working with.

A reserve account is the result of what the lender did not advance to you. For example, if the lender advanced you 90%, then 10% is considered your reserve and is added to the reserve account. The reserve will be disbursed to you once the invoice has been paid.

If you are interested in applying for AR financing, then we can help. Start by quickly filling out our free 90-second application, and get the funding you need today!

AR Financing Helps Businesses Grow

While AR financing might seem like a complex way to help your business grow, think again. Growing businesses have a lot going on and the last thing they need to worry about is cash flow. AR funding is the best way to get that money now.

If you’re looking for other types of financing, then you we can help you with a business lines of credit as well other forms of business funding. Apply today or call 888-782-0348 to speak with a financial advisor.