What is Accounts Receivable Financing?
Accounts receivable financing, also known as AR financing, allows companies to receive immediate funds for outstanding invoices. Companies using types of financing options for accounts receivable (AR) can commit invoices to a funding partner for earlier payment.
Porter Capital believes in several particular benefits of accounts receivable (AR) factoring. A company can increase its cash flow and avoid the strain of late payments. Taking a loan against receivables helps a company obtain cash without asking clients for immediate payment.
If a company is in high growth mode, young or simply does not fall into a traditional bank box, it can utilize a loan or line of credit provided by Porter Capital.
How Does Accounts Receivable Factoring Work?
In today’s tight credit environment, more and more companies are turning to alternative and non-traditional financing options to access the capital needed to keep business running smoothly.
Several tools are available to owners of cash-strapped businesses in search of financing. Two of the most popular are factoring and accounts receivable factoring (A/R financing). Many business owners lump the two together, but few small yet significant differences exist.
Factoring is the outright purchase of a business’s outstanding accounts receivable by a commercial financing company or “factor.” Typically, the factor advances 70 to 90 percent of the value of a receivable when it purchases the receivable.
The balance, less the factoring fee, is released when the invoice is collected. The factoring fee — which is based on the total face value of the invoice, not percentage advanced — typically ranges from 1.5 percent to 5.5 percent, depending on aspects such as the collection risk and how many days the funds are in use.
Under a factoring contract, the business can usually pick and choose which invoices to sell to the factor-it is not typically an all-or-nothing scenario. Once it purchases an invoice, the factor manages the receivable until it is paid.
The factor will essentially become the business’s credit manager and accounts receivable department, performing credit checks, analyzing credit reports, and mailing and documenting invoices and payments.
Contact Porter Capital today to discuss where your business may fall in the percentage range.
Benefits of Using AR Factoring
At Porter Capital, we make it easy to get immediate working capital solutions for your future business growth. AR factoring services allow you to accelerate your cash flow and build upward. Working with our account managers, you can create personalized accounts receivable funding contracts. Enjoy the flexibility of an AR factoring agreement built for your business.
Many companies experiencing rapid business growth choose accounts receivable loans to assist with delayed invoices. Our clients choose Porter Capital AR services for the following reasons:
- Immediate cash advance: Waiting 30, 60, or 90 days for a completed invoice can limit your business prospects. AR factoring services can place invoice funding in your account in 24 hours.
- Increased business outcomes: The opportunities are endless with faster deposits in your account. Businesses can use AR loans to increase staffing, create new products and improve workflow.
- Collateral flexibility: AR factoring can be a debt-free alternative if you’ve struggled to qualify for traditional loans. Your factoring contract would use accounts receivable as collateral, giving your business more room to grow.
- Capital availability: At Porter Capital, we are uniquely positioned to handle large-scale applications for AR factoring. As your long-term financial partner, we increase your capital availability as your sales improve.
- Simple applications: With factoring services for accounts receivable, you get what you need when you need it. Our customized factoring plans are easy to apply for, saving you valuable time. Watch as your company grows alongside our team of financing experts.
A/R Financing Vs. Factoring
Accounts receivable financing is more like a traditional bank loan but with several key differences. While traditional loans may be secured by different collateral, including plants and equipment, real estate, and/or the business owner’s personal assets, accounts receivable financing is backed strictly by a pledge of the business’s assets associated with the accounts receivable to the financing company.
Under an accounts receivable financing arrangement, a borrowing base of 70 percent to 90 percent of the qualified receivables is established at each draw against which the business can borrow money.
A collateral management fee (typically 1 percent to 2 percent) is charged against the outstanding amount. When money is advanced, interest is assessed only on the amount of money your business actually borrowed.
Typically, an invoice must be less than 90 days old to count toward the borrowing base, and the underlying business must be deemed creditworthy by the financing company. Other conditions may also apply.
As you can see, comparing factoring and accounts receivable financing options is tricky. One is actually a loan, while the other sells an asset (invoices or receivables) to a third party.
However, both have many similarities. Here are the main features of each option to consider before deciding which is the best fit for your company.
Accounts Receivable Financing
- Generally, less expensive than factoring.
- It tends to be easier to transition from accounts receivable financing to a traditional bank line of credit when a company becomes bankable again.
- It offers less flexibility than accounts receivable factoring because the business must submit all of its accounts receivable to the financing company as collateral.
- Typically requires a minimum of $75,000 a month in sales to qualify, so it may not be available to small business owners.
- Offers more flexibility than accounts receivable financing, because businesses can pick and choose which invoices to sell to the factor.
- Fairly easy to qualify for and is ideal for new and financially challenged companies.
- Has a simple fee structure that helps the company track total costs on an invoice-by-invoice basis.
Industries That Use AR Financing
Accounts receivable financing options are a common solution for many businesses. No matter the industry you serve, we can provide a factoring line of credit you can use to take care of daily operations.