Accounts Receivable Financing (A/R Financing) is mainly used for short term funding.
Accounts Receivable Financing (A/R Financing) is a great solution for businesses that need additional cash flow to deal with seasonal demands, growth, business opportunities, or solve a short-term cash need. It can be used to take advantage of new business opportunities, supplier discounts, hire additional employees, or even fund payroll.
- A/R financing allows a company to quickly obtain the money that is already owed by their clients. The company can get up to 90% of their accounts receivable right away instead of waiting 30, 60 or 90 days.
- Only invoices for work or products that have been 100% rendered or delivered can be used to raise A/R financing.
- Providers of A/R financing will usually advance up to 90% of an invoice upon its’ receipt along with the supporting documentation.
- The provider of the A/R financing takes over the task of invoice management to make sure that your customers pay according to the invoice terms.
- Once the provider of the A/R financing receives your customer’s payment, they release the remaining 10% to you less an administrative fee.
- The fee to get A/R financing usually ranges between 1-5%.
The following are the seven reasons why many businesses choose A/R financing for their short-term financing needs.
Collateral is not required to get A/R financing.
Most loans will require at least a ten percent down payment. Many businesses either don’t have this money, or they can’t afford to divert this capital from covering their day-to-day operating costs. Since a merchant cash advance is not a loan, down payments are not required.
A/R financing is much easier to secure and requires much less paperwork than getting a conventional loan.
A/R financing requires less rigorous underwriting because it focuses on your sales and not your balance sheet. In contrast, lenders base their decision on whether you get a loan based on your credit rating and financial statements.
Lenders require a business plan containing financial statements. This can take several weeks or even months to accomplish. With A/R financing the financing company makes their funding decision based on their analysis of your accounts receivable.
You can delegate the collection of accounts receivable to the company providing the A/R financing.
Delegating collections to an outside company frees up valuable time and allows you and your employees to concentrate your energies on servicing your customers and generating new business. Many times the 1-5% fee is well worth the price if it means that you don’t have to hire an extra employee to do this task.
Since A/R financing is not a loan, it doesn’t impact your ability to get other forms of financing.
Because A/R financing is not a loan, it does not impact your ability to get a loan. In contrast, an existing loan causes a subsequent loan to be placed in a subordinate position. This increases a lender’s risk of default and will cause them to either decline the loan or increase the interest rate.
There is a quicker turnaround time for A/R financing compared with an SBA or conventional business loan.
Applying for a loan can be a long process. Lenders require a business plan containing financial statements. This can take several weeks or even months to accomplish. After that, it usually takes a minimum of sixty to ninety days to get your funding.
In contrast, companies such as Newtek, can pre-qualify your accounts receivable for A/R financing for as much as $1.5 million or as little as $50,000 usually within two weeks. In most cases, you can usually get your money within two business days.
One big advantage of A/R financing is that it doesn’t create a new liability that needs to be paid back.
A/R financing is not debt financing. The business funding provided is gained by selling accounts receivable for a discounted price in order to get payment sooner.
Companies such as Newtek, provide credit protection when they offer A/R financing.
Newtek monitors and investigates the credit worthiness of each customer. They assume the credit risk once they approve and provide A/R financing on an account.