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Accounts Receivable (A/R) Financing
Discover the ins and outs of Accounts Receivable Financing, a funding option with significant downsides, to see if there might be better alternatives for your business.
What Is Accounts Receivable Financing?
Accounts receivable (A/R) financing allows businesses to use their unpaid invoices as collateral for a line of credit. This type of financing may help you cover expenses or invest in growth without waiting for customer payments, although it may have many potential downsides for entrepreneurs.
How Does A/R Financing Work?
A business can “sell” its outstanding invoices to a financing company in exchange for a cash advance. On the upside, your credit score often plays a smaller role. There are two main approaches: a/r financing and factoring. Each has potential drawbacks, which we’ll explore in greater detail below.
How to Use A/R Financing?
Accounts receivable financing can help bridge cash flow gaps, giving businesses immediate funds for operational expenses or payroll. It’s also a possible strategy for capitalizing on growth opportunities—like purchasing inventory or investing in marketing—without waiting for customer payments.
Managing Cash Flow Gaps
A/R financing provides quick access to funds, allowing businesses to cover daily expenses like payroll, rent, and utilities without waiting for customer payments.
Funding Marketing and Expansion Efforts
With immediate capital, businesses can invest in marketing campaigns, product development, or expansion initiatives to drive growth.
Managing Seasonal Demand
A/R financing helps businesses with seasonal demand, maintain cash flow during slower periods, ensuring they have the resources needed year-round.
The Difference Between Accounts Receivable Financing and Factoring
A/R Financing
A/R financing uses receivables as collateral for cash, with the business retaining responsibility for payment collection. This option is often preferable to factoring for businesses that want to maintain control over customer relationships.
Factoring
Factoring involves selling invoices to a third party, which then manages collections. This approach can suit businesses needing quick cash and wanting to outsource customer collections. However, it can get complicated, as collections touch on one of the most sensitive parts of the customer experience.
Why Apply for Accounts Receivable Financing?
Quick Access to Capital
Unlike traditional loans, accounts receivable financing may offer fast approval and funding, allowing businesses to access needed funds without lengthy application processes.
Flexible Financing Option
A/R financing grows with a business’s sales, meaning that as invoice amounts increase, the amount of available funding can also increase, offering flexibility for fluctuating business needs.
No Collateral Required Beyond Invoices
Since A/R financing is backed by outstanding invoices, businesses often don’t need to put up additional assets as collateral, reducing risk.
Pros & Cons of Accounts Receivable Financing
Pros
Your credit score is typically less of an issue
If factoring is used, you may avoid the hassles of collections (which may be a “pro” to some)
Cons
Fee structures can get complicated and expensive
Your customers’ credit matters
Handing over customer contact (if invoice factoring is used) may strain customer relations
Is A/R Financing Right for You?
Accounts receivable financing is only one solution. It’s important to explore other financing options such as those below, as other solutions will likely have unique benefits and costs better aligned with the needs and goals of your business.
Additional Loan and Financing Options to Consider
Small Business Loans: A Simpler Option to Explore
A small business loan is a funding option providing businesses with upfront capital to support growth, operations, or other financial needs with structured repayment terms. Unlike accounts receivable financing, a small business loan doesn’t rely on pending invoices or the credit ratings of your customers. This makes it better suited for many businesses needing substantial funds immediately.
Prepayment discounts
Borrow up to $1.5 million
The Revenue Advance: A Versatile Financing Solution
A revenue advance is a financing option where a business receives a cash advance based on future revenue projections, repaid through a percentage of daily sales. Unlike accounts receivable financing, a revenue advance also doesn’t depend on outstanding invoices or involve a third party discussing sensitive matters with your customers, making it ideal for businesses without large receivables but with consistent revenue streams.
Variable terms accommodate lower cashflow periods.
Weekly payback plans
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Minimum Eligibility Requirements
When exploring financing options with Blackrock, companies must meet a specific criteria. Here’s an overview of the minimum requirements you can expect.
Minimum Requirements
| Time in Business | Minimum 6 Months |
|---|---|
| Business Annual Growth Revenue | $240K+ Annual Revenue |
| Business Checking Account | Yes |
| US Citizen/Based Company | Yes |
| FICO Score | 570+ |
| Other Financing | None |
| Bankruptcies | None open |
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Purchase or Repair Equipment
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Accounts Receivable Financing FAQs
What are the two methods for financing accounts receivable?
The two primary methods are factoring and asset-based lending (ABL). In factoring, a business sells its invoices to a third party, or factor, which then collects directly from the customer. With asset-based lending, the business retains control over collections but uses its receivables as collateral for a line of credit.
What is trade receivables financing?
Trade receivables financing is a type of accounts receivable financing where a company receives immediate cash by leveraging its outstanding invoices. This financing allows businesses to manage cash flow gaps between delivering goods or services and receiving customer payments.
Which kinds of businesses need accounts receivable financing the most?
Businesses that face delayed payments or longer payment cycles, such as manufacturers, wholesalers, distributors, and service providers, benefit most. Startups and small-to-medium enterprises (SMEs) also often use A/R financing to maintain steady cash flow for operations and growth.
What types of receivables are eligible for accounts receivable lending?
Eligible receivables are generally invoices from creditworthy customers with clear payment terms. Invoices should be free of liens or prior claims and should not be subject to disputes. Often, only business-to-business (B2B) invoices qualify, while consumer debt and invoices over a certain age may not.
What are the benefits to accounts receivable financing?
Key benefits include:
- Improved cash flow without waiting for customer payments.
- Quick access to capital to cover operational costs or seize growth opportunities.
- No additional debt, as it's a financing solution based on assets rather than a loan.
- Easier qualification for businesses with strong receivables, even if their own credit may not be ideal.
How quickly can I get funds through accounts receivable financing?
Funds are typically accessible within 24 to 48 hours after invoices are submitted and verified, providing a fast solution for businesses needing immediate cash.
What are the typical fees or costs associated with accounts receivable funding?
Costs vary but are usually a percentage of the invoice value, often 1-5% depending on factors like the creditworthiness of customers, invoice size, and financing duration. Additional fees may apply for due diligence or administration, depending on the provider.
Does accounts receivable financing affect customer relationships?
It can, depending on the structure. In factoring, customers may be aware of the financing arrangement and may be contacted by the factor directly for payment. In financing, where the business retains control of collections, the impact on customer relationships is minimal.
How much of my invoice value can I expect to receive upfront?
Most financing companies advance between 70% and 90% of the invoice value upfront. The remaining amount, minus fees, is paid once the invoice is settled by the customer.
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Blackrock Consulting LLC provides business capital, including business loans and Revenue Based Financing, directly and through a network of unaffiliated third-party funding providers. All offers will depend on your business meeting at the time of submission our pre-qualification and/or underwriting criteria, which includes, but is not limited to, business & personal credit history, time in business, cash flow, revenue consistency, industry-specific underwriting rules. Business loans are offered by Blackrock Consulting LLC, by Blackrock Consulting LLC. Revenue Based Financing is offered by Blackrock Consulting LLC.