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What Is Accounts Receivable Financing?

Companies rely on invoice payments to maintain their operating expenses and make investments. However, those invoice payments don’t always come quickly enough to keep up with wages and other expenses. 

Some trucking companies use accounts receivable financing to obtain payment for their remaining invoice balances at a faster rate. If you need extra money but you don’t want to go into debt or you can’t borrow from the bank, accounts receivable financing is a funding source that can help.

How Does Accounts Receivable Financing Work?

Accounts receivable financing lets you obtain a percentage of your invoice’s face value. The financing company then collects the remaining invoice payments from your client. 

You will not incur any debt from this financing and can qualify even if you have bad credit. Accounts receivable financing companies will look at the client’s creditworthiness and payment history when assessing your application.

What Are the Three Primary Types of Receivable Financing?

Freight companies can make use of several different types of accounts receivable financing. Most companies turn to one of the following three types of receivables finance to raise extra funds.

Asset-Based Lending (ABL)

With asset-based lending, companies commit many of their receivables to an asset-based lending program. You will end up incurring expensive fees when you choose this financing option, and you won’t have as much control over which receivables the asset-based lender obtains.

Factoring

With factoring, a company will sell an invoice to a factoring company. The seller receives upfront capital equal to a predetermined percentage of the invoice’s face value, aside from fees. 

You’ll have more control over which invoices you sell to the invoice factoring company. The invoice factoring company will reach out to your customers and request that they pay their invoices, which can save you time. 

Selective Receivable Financing

With selective receivable financing, your company can choose which invoices are financed, which is similar to the invoice factoring model. However, you’ll still have to collect payments from your customers. 

Although this method won’t save you time, you’ll still get to communicate with your customers. Handing that relationship to a third party is risky, and doing so can reflect on your company poorly if the invoice factoring company is too aggressive.

What are the Eligibility Requirements To Qualify for Accounts Receivable Financing?

Accounts receivable financing companies won’t accept every applicant. You will need to meet these eligibility requirements in order to qualify:

  • An acceptable credit score 
  • A revenue requirement based on each accounts receivable financing company
  • A company that has been in business for least three months  

Can I Get Accounts Receivable Financing With Bad Credit?

You can obtain accounts receivable financing even if you have bad credit. This type of financing company will not look at your credit score when assessing your application because you won’t be the one paying the invoice. Instead, lenders will look at your customer’s credit when deciding on whether or not to accept your application.

Why Is Receivable Financing Important for Small Businesses?

Receivable financing lets small businesses tap into more capital. This funding source enables companies to pay wages, make investments and spend more of their budget on other parts of their businesses. 

Receivable financing does not require a small business to take on more debt in exchange for more capital. Some business owners cannot take out conventional loans and lines of credit due to poor credit, but they still need capital. Receivable financing makes cash more accessible to small business owners.

How To Apply For Accounts Receivable Financing

Business owners should take a look at several different accounts receivable financing companies to find the most affordable deals. Once you find the right company, you’ll need to apply, which you can do by following these steps. 

Step 1: Collect the Required Documents

Financing companies will ask for several documents to verify your identity and other important details. It’s a far simpler process compared to traditional financing, but you will still need these documents:

  • Outstanding invoices
  • Voided business checks
  • Bank statements
  • Driver’s license

Step 2: Choose the Receivables You Want To Finance

You don’t have to cash out on every invoice, but you still have to choose which receivables you’ll give to the financing company. You can take one of two approaches when trying to make this decision. 

Some business owners will provide financing companies with the invoices of customers who have not paid their invoices recently. You will receive a lower percentage of the invoice’s face value, but receiving some money from the invoice is better than receiving none at all.  

Step 3: Submit Your Application

After assembling the proper documents and deciding which receivables you want to cash out on, you’ll need to submit your application. Each financing company has a different process for submitting an application. You can find the details on their website or reach out to their support team.

Step 4: Receive Your Initial Accounts Receivable Advance

If you are approved, the lender will likely send you an advanced portion of the invoice. Most invoices will result in an 80% to 95% advance against the face value of the invoice.

Step 5: Wait For Your Customer To Pay the Invoice

Even though you’ve received your capital, the customer must still pay the invoice. You are still responsible for this step even if you opted for selective receivable financing. If you worked with an invoice factoring company, the lender will collect the invoice payments from your customers.

Step 6: Receive the Remaining Balance

After the customer finishes paying the invoice, you will receive the remaining balance after fees are taken. At this point, the relationship has ended in regard to that particular invoice. 

You may have provided the lender with additional invoices, at which point the relationship will reconvene. You can also decide to obtain financing with the invoices that you recently obtained.

Advantages of Accounts Receivable Financing

AR financing offers many advantages to business owners:

  •  You can get capital even if you have bad credit.
  •  Your company can receive funds from a customer who hasn’t paid their invoice.
  •  Accounts receivable financing will not increase your debt.
  •  You do not have to pledge any collateral.

Disadvantages of Accounts Receivable Financing

Although accounts receivable financing presents many advantages, it’s important to consider the disadvantages before you make your ultimate decision: 

  • The lender will communicate with your customer, which can hurt your business.
  • You will not receive the face value of your invoice.
  • This financing source may not work if your customers have bad credit. 

Raise Capital Without Good Credit

Many business owners rely on financing to keep up with their wages and expand their operations. Unfortunately, not every business owner has good credit. 

Traditional banks may turn them away, but accounts receivable financing lenders are an excellent option. You can raise money for your business even if you have bad credit, and you won’t incur any debt in the process.

Affordable Factoring with REV Capital

Stop waiting for unpaid invoices to finally reach your account. Move faster and plan ahead with affordable and reliable invoice factoring by REV Capital.

Affordable Factoring with REV Capital

Stop waiting for unpaid invoices to finally reach your account. Move faster and plan ahead with affordable and reliable invoice factoring by REV Capital.