How Does Accounts Receivable Financing Work?

You may be aware of various small business loans, but one option stands out as confusing – AR financing. Don’t worry, you wouldn’t be the first.

AR financing, or Accounts Receivable Financing, is a business loan that secures a lower interest rate by staking the money their clients owe the company through their accounts receivable.

These assets are worth an amount equal to the outstanding invoices billed to clients that have not yet been paid in full.

By taking out a loan against the value of these invoices, you can gain access to that money faster, without having to wait for your clients to come through.

Accounts receivable financing is a powerful tool to help large and small businesses get over cash flow problems.

How does Accounts Receivable Financing Work?
Let’s say your company has $5000 in accounts receivables in terms of invoices owed to your company. You apply using these as collateral with a business loans company by submitting them and other related documents.

The lending company will typically fund 80% of the invoice directly to you, depending on various industry factors and your credibility.

You can then use those funds to pay for your business expenses like payroll, inventory, and rent

The lender then charges a weekly fee for the invoice until the customer pays it. Then, they take the fees and provide you with the remaining balance once each customer pays the invoices.

When Should a Business Consider Using AR Financing?
Almost all businesses encounter a late payment for an invoice at some point. However, when these debts begin to accumulate, there can be a real difficulty with cash flow.

That’s where AR financing can help bridge the gap. For example, it’s not always easy to obtain a traditional bank loan with a good interest rate in the timeframe needed. AR financing is a direct solution to the problem, using the thing that’s a problem as collateral.

This is what makes AR financing a convenient alternative for small business owners who are faced with a relatively short-term (30-90 day) cash-flow gap. This is especially true if a business opportunity or seasonal demand is coming up.

What are the benefits of AR financing over other kinds?
Key benefits include quick approvals and money in the bank compared with traditional loan options. In addition, no collateral beyond the invoices themselves is needed. Plus, the application process is relatively easy to do.

It’s also beneficial because the contracts are short-term, making it less of a difficult commitment.

However, the most significant benefit is simply the peace of mind to smooth over any cash flow problems that come from many late payments. It’s a solution to a very common from that many small business owners may not have anticipated.

Of course, the interest rates and fees on AR financing are generally higher than more traditional long-term loans, but that’s where all the other benefits come in.

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