Accounts Receivable Financing: Best Options, How It Works

Accounts receivable financing, or AR financing, allows businesses to borrow capital against the value of their unpaid invoices. A lender advances a portion of the business's outstanding invoices, in the form of a small-business loan or line of credit, and the invoices serve as collateral on the financing.

Receivables financing can be a good option if you need fast funding to cover cash flow gaps or pay for short-term expenses.

Top accounts receivable financing companies

Accounts receivable financing is usually offered by online lenders and fintech companies, many of which specialize in this type of business funding. Certain banks offer AR financing as well.

If you’re looking for a place to start your search, here are a few of the best accounts receivable financing companies to consider.

AltLINE

A division of the Southern Bank Company, AltLINE is a lender that specializes in AR financing as well as invoice factoring (scroll down for an explanation of the difference). This lender works with small businesses in a variety of industries, including startups and those that can’t qualify for traditional loans.

AltLINE offers advances of up to 90% of the value of your invoices with fees starting at 0.80%. To get a quote from AltLINE, call a representative or fill out a brief application on the lender’s website. If you apply online, a representative will contact you within 24 hours.

AltLINE is accredited by the Better Business Bureau and has an A+ rating. It is rated 4.8 out of 5 stars on Trustpilot.

1st Commercial Credit

1st Commercial Credit offers accounts receivable financing in addition to other forms of asset-based lending, such as invoice factoring, equipment financing and purchase order financing. The company works with small- and medium-sized businesses, including startups and businesses with bad credit.

With 1st Commercial Credit, you can finance $10,000 to $10 million in receivables with factor rates ranging from 0.69% to 1.59%. You can start the application process by calling a sales representative or filling out a free quote form on the company’s website. After your application is approved, it can take three to five business days to set up your account and start receiving funding.

1st Commercial Credit is accredited by the Better Business Bureau and has an A+ rating.

Porter Capital

Porter Capital is an alternative lender specializing in invoice factoring and accounts receivable financing. The company also has a special division, Porter Freight Funding, which is dedicated to working with businesses in the transportation industry.

With Porter Capital, you can receive an advance of 70% to 90% of your receivables depending on your industry. You can provide basic information about your business to get a free quote, apply online and receive funding in as little as 24 hours.

Although Porter Capital isn't accredited by the Better Business Bureau, it does have an A+ rating; the company also has 3.8 out of 5 stars on Trustpilot.

How does accounts receivable financing work?

With accounts receivable financing, a lender advances you a percentage of the value of your receivables, potentially as much as 96%. When a customer pays their invoice, you receive the remaining percentage, minus the lender’s fees.

AR financing fees are typically charged as a flat percentage of the invoice value, and generally range from 1% to 5%. The amount you pay in fees is based on how long it takes your customer to pay their invoice.

Here’s a breakdown of how the process works:

1. You apply for and receive financing. Say you decide to finance a $50,000 invoice with 60-day repayment terms. You apply for accounts receivable financing and the lender approves you for an advance of 80% ($40,000).

2. You use the funds and the lender charges fees. After receiving the financing, you use it to pay for business expenses. During this time, the lender charges a 3% fee for each week it takes your customer to pay the invoice.

3. You collect payment from your customer. Your customer pays their invoice after three weeks. You owe the lender a $4,500 fee: 3% of the total invoice amount of $50,000 ($1,500) for each week.

4. You repay the lender. Now that your customer has paid you, you’ll keep $5,500 of the customer’s payment and repay the rest to the lender (the original advance amount, plus fees for a total of $44,500). You paid a total of $4,500 in fees, which calculates to an approximate annual percentage rate of 65.7%.

Because accounts receivable financing companies don’t charge traditional interest, it’s important to calculate your fees into an APR to understand the true cost of borrowing. APRs on accounts receivable financing can reach as high as 79%.

» MORE: Average business loan rates and what to know about interest costs

Accounts receivable financing vs. factoring

Accounts receivable financing is often confused with accounts receivable factoring. Although AR financing and factoring are similar, there are a couple of important distinctions:

• With AR factoring, a factoring company takes control of your invoices and manages the payment collection process with your customers.

• With AR financing, your invoices serve as collateral on your financing.

AR factoring can be a good financing option if you don’t mind giving up control of your invoices and you can trust a factoring company to professionally collect customer payments. If you’d rather maintain control of your receivables and/or you want to avoid putting up any additional collateral, AR financing is likely a better option.

» Learn more about the differences between invoice financing and factoring