What is Accounts Receivable Financing?


Susan Kelly

Dec 06, 2021

Accounts Receivable Financing is a type of financing arrangement in which companies receive fast working capital for their businesses while waiting for the outstanding invoices to get paid. Those invoices are for the payments which have not been received yet by the customers.

Understanding Accounts Receivable Financing

AR Financing turns account receivables (money owed) into cash for the business to invest in its growth and innovation. Moreover, Accounts Receivable Financing is a type of financing that means borrowing money based on the accounts receivables. Accounts receivable are listed on the company's balance sheet as an asset, as it is the current asset that is owed to the company.

Accounts receivable are highly liquid assets and are the balance of outstanding money. Most of the companies consider the accounts receivable burden because these liquid assets cannot be collected or converted into cash immediately. Therefore, the accounts receivable financing business is growing to overcome these liquidity issues and to meet the company's needs without being weighed down by short-term funding restrictions.

Besides, there is a significant term associated with AR Financing, known as "Factoring." It is the process of accounts receivable financing and the companies that focus on this financing business are known as "Factoring Companies." Many factoring companies are connected directly to the record of the company's accounts receivable. And, these financing companies provide fast financing capital for AR Balances.

Broad Forms of Accounts Receivable Financing

Accounts receivable financing is becoming more common because this commercial financing is easier to obtain than other capital financings. It allows small and large business owners to focus on their core business. AR Financing is a great solution to raise some working capital instead of getting a business loan. There are some major types of Accounts Receivable Financing. They are explained following:

  • Asset Sales or Factoring
  • Loans or Asset Base Lending

Asset Sales or Factoring

An asset Sales agreement is the common form of accounts receivable financing, especially for small businesses. In this agreement, the company sells its accounts receivable to the factoring institution (financier). It is the sale of receivables in which the financier will be responsible for the collection of accounts receivable invoices. The financier will pay the initial amount of capital of up to 90% of the value of invoices. After the collection of payments from customers, the financier will pay the remaining 10% or more payment minus fees to the company. Along with it, factoring companies charge fees that make this financing business profitable.

Sometimes, the accounts receivable financier has linked with the accounts receivable records in this form of financing. There are many leading factoring companies in this financing business. BlueVine is one of the best accounts receivable financing companies that give immediate capital by offering several financing options. For asset sales, BlueVine will pay you 85% to 90% of the amount of the invoices and it charges a 0.1% to 1% fee per week. The application process of this factoring company is really fast. So, you can get quick and easy capital for your business growth.

Loans or Asset-Based Lending

The loan agreement is also a broad form of Accounts receivable financing structure. In

such an agreement, the accounts receivable is not sold. Rather, the company owns

them and is responsible to collect the accounts receivable from debtors. Moreover, the

company gets the loan on basis of asset or accounts receivable balances and the

company must repay that loan with some interest rate and fee.

Many factoring companies are linked with accounts receivable records through software programs such as Xero, QuickBooks, and Freshbooks to give immediate loans against business lines of credit or individual invoices. Fundbox is the leading accounts receivable financing company that offers accounts receivable loans and lines of credit.

Their application process is fast due to the use of technologies. Furthermore, this factoring company can give a loan 100% of the account receivable amount in case of approval.

Advantages and Disadvantages of AR Financing

Accounts receivable financing allows companies to get quick cash. The application takes a few days to process and you'll receive the capital funding in your account. Moreover, if the company goes for asset sales structure in AR Financing, there is no worry about the collection of accounts receivable and repayment schedule. This financing agreement is available to both small and big businesses. Most importantly, it is accessible and user-friendly as compared to other traditional finance or capital management methods.

Although accounts receivable financing offers various key benefits, there are also some disadvantages to it. AR Financing is a quick way of getting cash but it comes at higher costs than financing through other types of business loans. With the loan structure, there is an interest expense too that can be high.

The Bottom Line

Accounts receivable financing is short-term funding and it is the best option for businesses facing cash flow hiccups. Any business, either small or large requires financing capital at some point to fix some operations of the business. AR Financing helps businesses to get through those financial hurdles. If you want to get accounts receivable financing, then find a reliable factoring company with minimum rates and fees. Also, make sure that you understand AR Financing, its structure, and how it will support your business.


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