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Using Accounts Receivable Financing to Grow Your Business

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Updated October 19, 2023​

4 min. read​

Are unpaid invoices causing cash flow problems in your business? Then, you can use accounts receivable financing to get over the hump, expand your company and potentially boost revenues. 

Read on to learn more about how it works and alternative funding options to secure the capital you need for your business.

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Can You Borrow Against Your Accounts Receivable?

Yes, you can borrow against your receivables through a type of financing that’s referred to as accounts receivable financing or AR financing.

How Does Accounts Receivable Financing Work?

Accounts receivable financing gives you capital for your outstanding invoices before they are paid to keep operations running smoothly. Then, when the customer pays the invoice off, you’ll receive the remainder of what you’re owed minus invoice factoring fees from the receivable financing company.

To illustrate, assume your company has $15,000 in receivables. You get approved for accounts receivable financing, and the lender agrees to fund 75% of the invoice. In this case, you’ll receive $11,250 now to use in your business and the remaining $3,750 (minus the factoring fees) when the invoice is paid in full.

Is Accounts Receivable Financing Right for Your Business?

Accounts receivable financing could be a good fit for your business if: 

  • You’re experiencing short-term cash flow issues that you could quickly resolve if customers made timely invoice payments. 
  • Your reserves are running low, and you need to pay your employees. 
  • You want to hire short-term help to help meet increased seasonal demand. 
  • You need to pay a supplier soon or want to capitalize on a bulk discount they’re offering. 
  • You want to grow your company but don’t have the funds or will have to deplete your reserves to do so. 
  • You’re dealing with a temporary downturn in business due to decreased demand and need cash to keep your operations afloat.

Common Types of Accounts Receivable Financing

Here’s a closer look at three popular types of accounts receivable financing options:

Asset-based Lending (ABL)

Asset-based lending includes loans and lines of credit that are secured by inventory, equipment or some other property owned by the borrower. This type of funding has steep fees, and business owners have a limited say in which receivables are funded.

Traditional Factoring

The company agrees to receive a percentage of receivables and pay processing fees in exchange for early payment. It’s a far more flexible option than ABL since you can select which receivables to trade for immediate payment, but the fees are generally higher. Unlike accounts receivable financing, the responsibility for collecting the receivables falls on the factoring company.

Selective Receivables Finance

You also can choose which receivables are advanced for early payment with this method, and you may be eligible to receive the entire amount owed. Plus, the interest rates are often lower than you’ll find with ABL and traditional factoring.

How to Grow Your Business Using Accounts Receivable Financing

There are several ways you can use accounts receivable financing to grow your business:

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Get Fast Access to Funding and Take Advantage of New Opportunities

You could get approved for accounts receivable financing and receive the cash you need in as little as 24 hours with select lenders.

Outpace Your Competition

This form of financing caters to small business owners, entrepreneurs, sole proprietors, and independent contractors

Manage Cash Flow Gaps and Solve Challenges on the Spot

Instead of stressing about how to close cash flow gaps, you can trade in your invoices for cash and resolve money issues promptly.

Sell One or Several Invoices

You have the option to sell just one or as many invoices as you’d like to meet your cash flow needs.

Keep Your Equity and Avoid Debt

Selling off a portion of your company to get cash isn’t necessary, and you’ll avoid taking on additional debt.

How to Qualify for Accounts Receivable Financing 

It depends on the type of lender you select. Be mindful that accounts receivable financing is usually only offered through online lenders and fintech companies.

You can use an online lending platform to help you sift through options and identify lenders with eligibility criteria you meet. Keep in mind that using this method to find accounts receivable financing options doesn’t mean you have to meet minimum FICO score or revenue requirements. Instead, you’ll typically be required to submit three months of bank statements and undergo a soft credit check. The online lending platform will present accounts receivable financing offers that could work for your business.

What’s the Best Alternative to Accounts Receivable Financing? 

It depends on your company’s financial status and how you plan to use the funds. However, there are viable alternatives to get the cash you need to keep operations running smoothly. These include: 

  • Small business loans: These are popular installment loans that are dispersed in a lump sum and payable in monthly installments over a set period of time. If you get a fixed-rate loan, your monthly payment will remain the same. But if it’s variable, you can expect fluctuations in your monthly payment if market conditions change. You’ll have the freedom to use the loan proceeds however you see fit as long as they’re for business-related expenses. Also, be mindful that you’ll need an established business, a good or excellent credit score and proof of profitability in the past two years when applying with a traditional bank. But if you choose an online lender, you’ll likely have more flexibility. 
  • Small business lines of credit: A small business line of credit is another form of business financing, but it differs from a traditional loan. Instead of receiving the funds upfront, you’ll have access to a pot of money you can pull from during what’s referred to as the draw period. It works like a credit card as you’ll only pay interest on the amount you borrow, and you’re free to re-use the funds as often as you’d like as you repay what you withdraw. And in some instances, lenders assess interest-only payments during the draw period. But once the draw period ends, you can no longer access the funds and must make monthly payments over the preset loan term until the balance is paid in full. 
  • Merchant cash advances: If you accept credit card payments, a merchant cash advance may also be worth considering to access working capital. It’s a form of unsecured financing that lets you borrow funds based on your future credit card sales. So, instead of making monthly loan payments, the lender will withhold a portion of your credit card sales as they come in until you repay the amount you borrow. Another major benefit is the ability to focus on your business without having to worry about keeping up with the loan payments since it’s based on your sales volume. So, a downturn in your industry means you’ll pay less towards the loan during that period, and you may have the option to adjust the amount the lender withholds from your credit card payments until you get back on track. 
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