Maintaining a steady cash flow is a common stumbling block for many businesses. When you have the occasional cash flow blip, financing may be the answer to keep your business running smoothly. <a href="/business/small-business-solutions/borrowing/accounts-receivable">Accounts receivable funding</a>, also called invoice financing or factoring, is designed to help cover short-term cash needs, but it may be a better fit for some business owners than others.
<h3>How accounts receivable financing works</h3>
Business financing isn't all the same. A <a href="/business/small-business-solutions/borrowing/term-loans">term loan</a>, for instance, allows you to borrow a set amount of money, which is repaid over a period of months or years. The loan may or may not require capital, and term loans can have a fixed or variable interest rate. Accounts receivable funding isn't a loan, per se. Instead, you're taking a cash advance against the value of your receivables.
Here's how it works: The financing company purchases your receivables in exchange for collection rights on those invoices. They then advance you a percentage of the value of your receivables in cash, which you repay over a set time period. The financing company assumes collection duties for unpaid invoices, leaving you free to focus on your business in the meantime.
<h3>What is AR financing good for?</h3>
Accounts receivable financing is designed to help you overcome short-term cash flow hurdles. For example, you could use AR financing to cover payroll, pay annual insurance premiums or taxes, or just meet your day-to-day operating expenses. It's not meant to be used for long-term growth projects or refinancing debt. For that, a term loan might be more appropriate.
Besides filling short-term cash flow gaps, AR financing offers several additional benefits:
<ul>
 <li>Generous funding limits. Depending on the lender, you may be able to get an advance equal to between 80 and 90 percent of your outstanding receivables.</li>
 <li>Convenience. Approval and funding are often faster than a loan, with many AR financing companies getting the money to you in one to two business days.</li>
 <li>No collateral required. Accounts receivable financing relieves the pressure to offer business or personal assets as collateral. Be aware, however, that you may still be required to offer a personal guarantee, which makes you personally liable for repaying the advance.</li>
 <li>Retain ownership of your business without adding to your debt. Generally, business financing falls into two categories: equity and debt. Equity financing typically requires you to give up an ownership stake in your business in exchange for funding. Debt financing leaves you in control of the business but adds debt to your balance sheet. Because accounts receivable financing isn't a loan, it doesn't increase your debt, and it doesn't affect your ownership in the business.</li>
</ul>
<h3>Qualifying for accounts receivable funding</h3>
Individual accounts receivable financing companies have their own guidelines for determining who qualifies. The most important criteria they consider are:
<ul>
 <li>Your personal and business credit scores</li>
 <li>Time in business</li>
 <li>Annual revenue</li>
</ul>
Those are similar to what a bank would consider for a loan, but accounts receivable financing offers more flexibility for approval. For example, it may be possible to get approved with a lower credit score or if you have a newer business. A bank, on the other hand, may require more extensive credit history or only work with established businesses.
<h3>Are there any drawbacks to consider?</h3>
Like other types of business financing, accounts receivable funding has its pros and cons. One of the most important downsides to consider is cost.
Unlike a loan, accounts receivable financing doesn't have an assigned interest rate that you repay. Instead, the financing company charges a factor fee, which determines the cost of the advance. This fee can be charged weekly or monthly and may range from half a percent to five percent. A separate processing or closing fee may also be added in.
How much you'll pay for accounts receivable funding depends on the time frame in which the financing company expects your invoices to be paid. Here's an example.
Assume that you have $100,000 in receivables and the financing company advances you $85,000. The remaining $15,000 is held in reserve, with a one percent factor fee assessed weekly against the full $100,000 value of the invoices. It takes six weeks for the invoice to be paid, meaning you pay $6,000 total in fees to the financing company. The remaining $9,000 in reserve is returned to you, but you've effectively paid a 52 percent annual percentage rate on the advance.
The longer it takes for the invoices to be paid, the more the invoice financing may cost you. The fee itself is based on your customers' credit profile, not your own. If your customers have a lower score, that could raise the factor fee, again making accounts receivable financing a more expensive option. If you have a strong credit profile, you may be able to get a much lower rate with a loan or line of credit instead.
While accounts receivable financing may seem more appealing than other types of business financing, it's important to look at all the options.
Speak to a <a href="/personal/checking-and-savings/checking/totalview-checking">business lending specialist</a> to help you find the right cash flow solution.

Cash Flow Issues

Maintaining steady cash flow

Using Accounts Receivable Financing to Solve Short-Term Cash Flow Issues

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