Key takeaways
- Accounts receivable financing is a funding option specific to B2B companies.
- Your unpaid invoices serve as collateral to secure the loan.
- APRs for accounts receivable financing can reach as high as 79%.
- If your customers tend to pay their invoices on time and your business can use a fast injection of cash, this type of financing may be a good fit.
What is accounts receivable financing?
Accounts receivable financing, or AR financing, is a type of asset-based loan that allows B2B companies to borrow cash against 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.
Because accounts receivable is considered a business asset, the invoices serve as collateral on the financing.
How much do you need?
We'll start with a brief questionnaire to better understand the unique
needs of your business.
Once we uncover your personalized matches, our team will consult you
on the process moving forward.
When to use AR financing
AR financing may be an option if all of the below are true:
- You're a B2B company with many unpaid invoices. Accounts receivable financing (also called invoice financing) is designed for companies that sell to other businesses or government customers and then wait weeks or months to get paid.
- You need money quickly to cover cash flow gaps or short-term expenses. If you can’t wait 30, 60 or 90 days to collect payment from customers, AR financing can be a quick way to access money you’re already owed. Many companies can fund as quickly as one to five business days.
- You feel confident your customers will pay their invoices on time. Because you’ll be charged each week or month the loan goes unpaid, accounts receivable financing is generally best for businesses with reliable customers that have a strong payment history. If your customers don’t pay, you’ll be on the hook to pay back borrowed funds.
- You don’t qualify for cheaper financing. Accounts receivable financing can be expensive, especially if you have slow-paying customers. That’s why it’s generally a viable option for B2B companies that may not qualify for traditional business loans, such as newer companies or owners with less-than-ideal credit.
- You want to maintain control of your invoices. AR financing allows you to retain control over collecting payments from customers. This is in contrast to invoice factoring, where you sell your invoices to a factoring company that collects payment directly from your customers.
🤓 Nerdy Tip
If you can wait weeks for funding and have strong revenue and a good credit score, consider applying for a bank loan instead. You’ll likely pay it back over a longer period of time, but you’ll be looking at an average APR of 6.8% to 11% (versus 10% to 79% for invoice financing). 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 weekly or monthly as a flat percentage of the invoice value, and generally range from 1% to 5%. The longer it takes your customer to pay their invoice, the more you’ll pay in fees.
Here’s an example of how it works:
- You apply for and receive financing. You 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).
- 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.
- 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.
- 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%.
Pros and cons of financing accounts receivable
Pros
Access to funding in as fast as 24 hours, depending on the lender.
Startups and borrowers with bad credit may qualify.
Cons
Can be expensive, especially if your customers are slow to pay.
If a customer doesn’t pay their invoice at all, you’ll be on the hook to repay borrowed funds.
Fees are largely determined by the creditworthiness of your customers.
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
AltLINE AltLINE - Invoice factoring
Max Loan Amount
$5,000,000 A division of the Southern Bank Company, AltLINE is a lender that specializes in AR financing as well as invoice factoring (see below 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 4.4 out of 5 stars on Trustpilot.
SBG Funding
SBG Funding offers a range of small-business lending options, including accounts receivable financing.
With SBG Funding’s AR financing, you may be able to borrow up to 90% of the value of outstanding invoices. Funds can be available as quickly as 24 hours after your application is approved.
To qualify, you need at least $150,000 in annual revenue, six or more months in business and a credit score of 500 or higher.
SBG Funding is accredited by the Better Business Bureau and has an A rating. It also boasts strong Trust Pilot reviews, with an average rating of 4.9 out of 5 stars.
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 up to 90% of the value of eligible invoices with fees 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.
Accounts receivable financing not the right fit?
If AR financing doesn’t seem to be the best fit for you, explore our list of top-rated online lenders that offer a range of financing options with more lenient qualification requirements than traditional lenders.
» MORE: Best online business loans
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
