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Everything You Need to Know About Accounts Receivables Financing 

Published By Faith Stewart at November 14th, 2019

Accounts receivables financing can be a great option if you have accounts receivable.  However, you also need to know what else is out there.

… And What to Do for Funding Beyond Accounts Receivables Financing 

Accounts receivables financing is not something that you hear a lot about.  There is a ton of information out there about loans, credit cards, and even lines of credit.  No one really talks about financing your receivables though. That is, until you start trying to figure out how to get cash fast.  If you need fast cash and you have open receivables, then A/R financing may be just what you need.

Don’t confuse accounts receivables financing with accounts receivables selling.  They are two different things used for two different purposes. For example, selling your receivables serves as more of a means of getting older receivables off the books. 

The buyer pays a premium and then tries to collect the full value of the receivable.  The business owner never gets any more money than the original selling price. You get cash fast and you get the receivables off the books. 

Accounts receivable financing is different.  You can do it in a couple of ways. The first is, you can simply use the invoices as security for a loan.  The other, is invoice factoring. This is a mix of selling and financing. In factoring, the factoring company pays you a portion of the value of the invoices.  Then, they collect what they can, hopefully full value. They then keep their set, agreed upon fee, and send you the difference. 

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This means that the amount you get when you first factor the invoices may not be all you get. You will still get the difference in the amount collected less what you have already received and the factoring fee. 

What Are the Benefits of Accounts Receivables Financing?

Accounts receivables financing is not the best choice for every business in every situation, but there are some times when it truly is the best option.  Done correctly, there can be many benefits. For example:

  • Faster, less complicated process than what is typical with other types of financing
  • Accounts receivables financing premiums are often less than the interest rates and fees with traditional financing. 
  • In some cases, it is easier to qualify for A/R financing because lenders look at the quality of your invoices rather than your credit history.  
  • You get your money faster.
  • Accounts receivables financing can happen on an ongoing basis so as to bridge the cash gaps due to slow collections. 

How Do You Qualify for Accounts Receivables Financing? 

While all financing companies have their own qualification requirements, these can give you an idea of the minimum most require to be eligible for accounts receivable financing. 

  • They must, of course, issue invoices to customers
  • There must typically be at least $50,000 in annual revenue 
  • Usually they require that a business has been in operation for at least 6 months
  • Customers must be creditworthy, meaning they are likely to pay their invoices

It is important to remember that, while there are some instances where the financing company will take on the task of collecting on the invoices, the debt is still the responsibility of the business owner receiving the financing. Regardless of who is doing the collecting, if the invoice is not paid, the business owner is still responsible for the debt to the lender. 

Where Can You Get Accounts Receivables Financing?

There are many lenders that offer this service.  Here are a few options but, remember that details change without notice. Always check with the lender directly for the most up to date information on interest rates and eligibility requirements.

1st Commercial Credit

This lender has been around for 15 years.  They offer invoice financing with an administration fee.  1st Commercial Credit boasts a fast approval process, and they do not require financial statements for financing up to $350,000.  You can set up your accounts receivables financing with them in as little as 3 to 5 days. 

New Century Financial 

New Century Financial offers invoice financing up to 90% of the original invoice.  They claim streamlined, fast processing with no hidden fees. 

Blue Elephant Financing

This company works with businesses that have government contracts.  They offer account receivables financing related to FEMA, HUD, and other government contracts. Blue Elephant Financing prides itself on an easy application process and fast turnaround. 

Capital Plus Construction Services

Capital Plus offers accounts receivables financing related to construction contracts specifically.

Star Funding

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This company will not only do accounts receivables financing, but they will also help you collect on open invoices. This is a major plus for a lot of businesses. If you need or want collection help along with financing, Star Funding is for you.  They also offer accounts receivable management services.

Seven Oaks Capital Associates

Seven Oaks also offers general accounts receivables financing services along with collection and management services.  In addition, they can help you obtain credit information on those to whom you extend credit.

Of course there are hundreds of companies out there that offer these services.  These are just a few to get you started. 

A Word About Merchant Cash Advances

If you need a similar option but do not have a ton of open invoices, you might look into getting a merchant cash advance. This is similar to factoring invoices, but it works based on average credit card sales. Basically, you get an advance on your projected credit card sales. 

Here’s how it works.  First, you will submit information about your average daily credit card sales.  Then, the cash advance company will tell you how much you are eligible for based on that average.  

What Else Should You Be Doing? 

Now, the allure for many small businesses is that this type of financing doesn’t require great credit.  In fact, if your invoices are solid, the factoring company may not even do a credit check. If you have bad credit or no credit,  that is a good thing. However, you need to think beyond the right now and consider the future.

Working to build business credit is vital because this type of financing will not work for every need.  

Every Small Business Needs To Establish Business Credit

This is credit in a small business’s name. It doesn’t connect to an entrepreneur’s consumer credit. Here is why you need it: 

  • Since small business credit is distinct from individual, it helps to safeguard an entrepreneur’s personal assets, in the event of court action or business insolvency.
  • With two distinct credit scores, an entrepreneur can get two different cards from the same vendor. This effectively doubles buying power.
  • Even startup companies can do this. Visiting a bank for a business loan can be a recipe for disappointment. But building company credit, when done correctly, is a plan for success.
  • Consumer credit scores depend on payments but also various other elements like credit use percentages. For small business credit, the scores really merely hinge on whether a small business pays its debts punctually.

So where do you start?  How do you establish business credit?  It’s a process that has to be done in the right order.  You have to actually work toward it. It doesn’t happen on its own.

How to Establish Business Credit

Accomplishing the steps out of sequence leads to repetitive denials. No one can start at the top with business credit. For example, you can’t start with retail or cash credit from your bank. If you do, you’ll get a denial 100% of the time.

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Start with Business Fundability

A small business has to be fundable to credit issuers and vendors. This includes a number of things.  The first, is that a business needs its own phone number and address separate from the owner. They each need to be listed with the directoriesIt will also need an EIN.  This is similar to a social security number, only for a business rather than an individual.  You can get one free from irs.gov.

Then, the business has to be incorporated.  A sole proprietorship or partnership won’t work for building business credit.  Whether you choose to organize as a corporation, S-corp, or LLC will depend on the level of liability protection you want and on your budget.  Any of them work for business credit building. 

Another necessary step for your business to appear fundable is to have a separate business bank account.  Do not mingle personal and business expenses in the same account. Not only does that not work for building business credit, but it makes for a tangled mess come tax time.  

Lastly, and surprisingly to some business owners, your business needs a professional website.  Along with this goes an email address that is separate from the owners. The website needs to look professional, which probably means hiring a professional to do it.  A lender will be much less likely to take you seriously as a business if you have a poorly put together website in today’s business world. The email address needs to have the same URL as the website and not be from a free service such as Gmail or Yahoo.  Also, the website needs to have website hosting from a paid supplier such as GoDaddy. Free hosting doesn’t work for this situation.

Get Accounts Reporting

Start at the D&B web site and obtain a free D-U-N-S number. A D-U-N-S number is how D&B gets a company into their system, to produce a PAYDEX score. If there is no D-U-N-S number, then there is no record and no PAYDEX score.

After you do this, you can start establishing tradelines that will report to the credit reporting agencies (CRAs).  They are starter vendors that will extend invoices with net terms without a credit check.  When they report your payments, your credit score will begin to grow. 

 Store Credit

Once you have several vendor trade accounts reporting to at least one of the CRAs, then you can move on to store credit. These are companies like Office Depot, Staples, and Lowes.  The reason you have to go through start credit vendors first, before applying for these store cards, is that they need to see a PAYDEX score to grant approval. 

For example, Lowe’s likes to see a PAYDEX of 78.  The only way to get this is to establish tradelines with starter vendors. 

As you handle store credit responsibly by making on time payments, your credit score will grow even more. 

Fleet Credit

After there are several accounts from the retail credit tier reporting on-time payments, your score should be strong enough to apply for fleet credit.   This is from businesses such as BP and Conoco. Use this credit to purchase fuel, and to fix, and maintain vehicles

One such example is Shell. They report to D&B and Business Experian. They need to see a PAYDEX Score of 78 or more and a 411 small business telephone listing. This is another reason why a business contact listing is important.

Cash Credit

After all of this, your score should be stable enough to apply for cash credit cards. These are companies like Visa and MasterCard, but not related to a specific retailer as in store credit.  They are not limited in use by location or purchase type.

Monitor Your Business Credit

As you go through the tiers, and even after you are beyond the cash credit tier, you need to know what is happening with your credit. Make sure it is being reported and take care of any inaccuracies as soon as you can. 

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We can help you monitor business credit at Experian and D&B for 90% less than it would cost you at the CRAs.

Accounts Receivable Financing Can Be a Great Option, But Don’t Stop There

Whether you are looking into accounts receivable financing because it is the best option for your needs or because it is the only option due to credit issues, you can work on building business credit in the meantime.  Personal credit is just not sufficient for business expenses.  

Our tried and true method for establishing and building business credit will ensure you have strong business credit.  Then, your financing is only limited by you needs, and not by your options.   

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