When you send an invoice, waiting 30, 60, or even 90 days for payment can strain your cash flow. This makes it tough to cover payroll or buy materials. Accounts receivable (AR) financing solves this problem by turning your unpaid invoices into immediate cash.
How AR Financing Works
AR financing lets you sell outstanding invoices to a third party at a small discount. In return, you get a cash advance, typically 80% to 95% of the invoice value. It’s not a loan; you're just accessing money you already own. This strategy helps improve your cash flow.
First, you submit invoices to a financing company. The lender evaluates your customer's creditworthiness, not just yours. Once approved, they advance you a large portion of the invoice's value. The remaining percentage, called a reserve, is held until your customer pays.
The lender then collects payment from your customer. After the full payment is received, the lender gives you the reserve amount, minus their fee. This provides the working capital you need to operate smoothly.
Types Of AR Financing
There are two main types of accounts receivable financing:
Invoice Factoring
You sell your invoices to a "factor," which then manages collections. This is great for businesses that want to outsource this administrative work. Your customers pay the factor directly. This is a common form of invoice factoring for small business.
Invoice Financing
This works more like a line of credit secured by your receivables. You get an advance but continue to manage your own collections. This option is confidential, so your customers are unaware of the financing.
Costs and Eligibility
The cost of AR financing is based on a discount rate, typically 1% to 5% of the invoice value per month. Other fees for processing or wire transfers may apply.
Qualifying is easier than for a traditional loan because lenders focus on your customer's credit history. To be eligible, you usually need:
- Customers with a good payment history.
- Clear invoices for completed work.
- An accounts receivable aging report.
This makes what is accounts receivable financing a powerful tool for businesses with strong clients but limited credit history.
If slow-paying customers are creating cash flow headaches, FSE - Funding Solution Experts can help. We connect you with over 50 lenders for fast funding. Start your no-obligation application at https://www.fseb2b.com.