Accounts Receivable (A/R) Financing
Discover the ins and outs of Accounts Receivable Financing, a funding option with significant downsides, to see if there might be better alternatives for your business.
What Is Accounts Receivable Financing?
Accounts receivable (A/R) financing allows businesses to use their unpaid invoices as collateral for a line of credit. This type of financing may help you cover expenses or invest in growth without waiting for customer payments, although it may have many potential downsides for entrepreneurs.
How Does A/R Financing Work?
A business can “sell” its outstanding invoices to a financing company in exchange for a cash advance. On the upside, your credit score often plays a smaller role. There are two main approaches: a/r financing and factoring. Each has potential drawbacks, which we’ll explore in greater detail below.
How to Use A/R Financing?
Accounts receivable financing can help bridge cash flow gaps, giving businesses immediate funds for operational expenses or payroll. It’s also a possible strategy for capitalizing on growth opportunities—like purchasing inventory or investing in marketing—without waiting for customer payments.
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Managing Cash Flow Gaps
A/R financing provides quick access to funds, allowing businesses to cover daily expenses like payroll, rent, and utilities without waiting for customer payments.
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Funding Marketing and Expansion Efforts
With immediate capital, businesses can invest in marketing campaigns, product development, or expansion initiatives to drive growth.
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Managing Seasonal Demand
A/R financing helps businesses with seasonal demand, maintain cash flow during slower periods, ensuring they have the resources needed year-round.
The Difference Between Accounts Receivable Financing and Factoring
A/R Financing
A/R financing uses receivables as collateral for cash, with the business retaining responsibility for payment collection. This option is often preferable to factoring for businesses that want to maintain control over customer relationships.
Factoring
Factoring involves selling invoices to a third party, which then manages collections. This approach can suit businesses needing quick cash and wanting to outsource customer collections. However, it can get complicated, as collections touch on one of the most sensitive parts of the customer experience.
Why Apply for Accounts Receivable Financing?
Quick Access to Capital
Unlike traditional loans, accounts receivable financing may offer fast approval and funding, allowing businesses to access needed funds without lengthy application processes.
Flexible Financing Option
A/R financing grows with a business’s sales, meaning that as invoice amounts increase, the amount of available funding can also increase, offering flexibility for fluctuating business needs.
No Collateral Required Beyond Invoices
Since A/R financing is backed by outstanding invoices, businesses often don’t need to put up additional assets as collateral, reducing risk.
Pros & Cons of Accounts Receivable Financing
Pros
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Your credit score is typically less of an issue
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If factoring is used, you may avoid the hassles of collections (which may be a “pro” to some)
Cons
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Fee structures can get complicated and expensive
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Your customers’ credit matters
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Handing over customer contact (if invoice factoring is used) may strain customer relations
Is A/R Financing Right for You?
Accounts receivable financing is only one solution. It’s important to explore other financing options such as those below, as other solutions will likely have unique benefits and costs better aligned with the needs and goals of your business.
Additional Loan and Financing Options to Consider
Small Business Loans:
A Simpler Option to Explore
A small business loan is a funding option providing businesses with upfront capital to support growth, operations, or other financial needs with structured repayment terms. Unlike accounts receivable financing, a small business loan doesn’t rely on pending invoices or the credit ratings of your customers. This makes it better suited for many businesses needing substantial funds immediately.
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Prepayment discounts
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Borrow up to $1.5 million
Revenue Advance:
A Versatile Financing Solution
A revenue advance is a financing option where a business receives a cash advance based on future revenue projections, repaid through a percentage of daily sales. Unlike accounts receivable financing, a revenue advance also doesn’t depend on outstanding invoices or involve a third party discussing sensitive matters with your customers, making it ideal for businesses without large receivables but with consistent revenue streams.
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Variable terms accommodate lower cashflow periods.
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Weekly payback plans
We're a Funding Partner
with a Proven Track Record
Since 2008, we've grown with the companies we support.
Minimum Eligibility Requirements
When exploring financing options with Fora Financial, companies must meet a specific criteria. Here’s an overview of the minimum requirements you can expect.
| Time in Business | Minimum 6 Months |
|---|---|
| Business Annual Growth Revenue | $240K+ Annual Revenue |
| Business Checking Account | Yes |
| US Citizen/Based Company | Yes |
| FICO Score | 570+ |
| Other Financing | None |
| Bankruptcies | None open |
Better Your Business With Fora Financial
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Release New Products
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Hire Skilled Workers
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Purchase or Repair Equipment
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Enhance Your Brand
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Get New Customers
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Expand Business Location
Case Studies
Technology and Data Services
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Funding Amount: $700,000
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Approval Amount: $1.1 Million
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Industry: Technology / Data Services
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Use of Funds: Cash Flow Liquidity
Communications Expansion
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Funding Amount: $1 Million
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Approval Amount: $1.2 Million
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Industry: Telecommunications
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Use of Funds: Expansion
Featured Funding
Stabilizing Growth
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Initial Funding Amount: $750,000
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Add-on Opportunity: $450,000
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Industry: Manufacturing
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Use of Funds: Financial Stability, Growth
Automation Growth
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Funding Amount: $300,000
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Approval Amount: $450,000
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Industry: Manufacturing / Automation
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Use of Funds: Working capital
Featured Funding
National Food and Beverage Franchise Network
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Funding Amount: $1.4 million
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Industry: Food and Beverage Franchise
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Use of Funds: Expansion and Renovation
Organic Growth
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Funding Amount: $750,000
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Approval Amount: $1,400,000
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Industry: Organic Food Grower
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Use of Funds: Cash Liquidity
Featured Funding
Delivery Service Expansion
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Funding Amount: $100,000
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Industry: Delivery Service
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Use of Funds: Equipment
Supporting Growth in Construction
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Funding Amount: $300,000
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Early Renewal: Additional $300k available in 60 days
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Industry: Construction
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Use of Funds: Cash Flow
Featured Funding
Physical Therapy
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Funding Amount: $1,000,000
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Industry: Healthcare
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Use of Funds: Expansion, Cash Flow
Subordinate Position
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Funding Amount: $2,000,000
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Approval Amount: $2,700,000
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Industry: Professional Services
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Use of Funds: Expansion, Cash Flow
Bridge Capital for Explosive Growth
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Funding Amount: $1,000,000
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Approval Amount: $2,500,000
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Industry: Construction
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Use of Funds: Bridge Financing, Expansion
Empowering Healthcare Staffing Growth
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Funding Amount: $1,000,000
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Approval Amount: $1,400,000
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Industry: Healthcare Staffing
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Use of Funds: Expansion
Facilitating Growth in Commercial Forestry Industry
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Funding Amount: $750,000
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Industry: Forestry
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Use of Funds: Hiring Additional Staff, Acquiring New Equipment and Materials
Opportunistic Growth
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Funding Amount: $400,000
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Industry: Electric Company
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Use of Funds: Opportunistic Growth
Fueling Expansion
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Total Funding: $5,000,000
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Renewals: 4 times in 16 months
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Initial Funding: $1,100,000
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Industry: Commercial Storage
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Use of Funds: Cashflow Gaps, Growth
Crafting Culinary Success
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Funding Amount: $1,000,000
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Industry: Specialty Food
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Use of Funds: Production, Technology, Marketing
Fitness Transformations
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Funding Amount: $150,000
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Industry: Fitness and Wellness
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Use of Funds: Expansion
Brewing Success
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Funding Amount: $170,000
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Industry: Food and Beverage
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Use of Funds: Product development, customer experience, marketing
Empowering Wellness
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Funding Amount: $750,000
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Industry: Health and Wellness
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Use of Funds: Bridge Financing
In with the View
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Funding Amount: $240,000
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Industry: Construction
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Use of Funds: Expansion
Growing Green
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Funding Amount: $750,000
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Industry: Landscaping
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Use of Funds: Payables, Expansion
Crafting Success
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Funding Amount: $800,000
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Industry: Manufacturing and Wholesaling
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Use of Funds: Equity Raise, Production, Efficiencies
Advancing Medical Excellence
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Funding Amount: $720,000
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Industry: Healthcare
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Use of Funds: Equipment, Staffing, Patient Experience
Fashionable Success
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Funding Amount: $300,000
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Industry: Retail
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Use of Funds: Inventory, Renovations
Charting New Horizons
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Funding Amount: $220,000
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Industry: Travel and Tourism
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Use of Funds: Product Offering, Technology, Partnerships
Accounts Receivable Financing FAQs
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The two primary methods are factoring and asset-based lending (ABL). In factoring, a business sells its invoices to a third party, or factor, which then collects directly from the customer. With asset-based lending, the business retains control over collections but uses its receivables as collateral for a line of credit.
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Trade receivables financing is a type of accounts receivable financing where a company receives immediate cash by leveraging its outstanding invoices. This financing allows businesses to manage cash flow gaps between delivering goods or services and receiving customer payments.
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Businesses that face delayed payments or longer payment cycles, such as manufacturers, wholesalers, distributors, and service providers, benefit most. Startups and small-to-medium enterprises (SMEs) also often use A/R financing to maintain steady cash flow for operations and growth.
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Eligible receivables are generally invoices from creditworthy customers with clear payment terms. Invoices should be free of liens or prior claims and should not be subject to disputes. Often, only business-to-business (B2B) invoices qualify, while consumer debt and invoices over a certain age may not.
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Key benefits include:
- Improved cash flow without waiting for customer payments.
- Quick access to capital to cover operational costs or seize growth opportunities.
- No additional debt, as it's a financing solution based on assets rather than a loan.
- Easier qualification for businesses with strong receivables, even if their own credit may not be ideal.
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Funds are typically accessible within 24 to 48 hours after invoices are submitted and verified, providing a fast solution for businesses needing immediate cash.
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Costs vary but are usually a percentage of the invoice value, often 1-5% depending on factors like the creditworthiness of customers, invoice size, and financing duration. Additional fees may apply for due diligence or administration, depending on the provider.
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It can, depending on the structure. In factoring, customers may be aware of the financing arrangement and may be contacted by the factor directly for payment. In financing, where the business retains control of collections, the impact on customer relationships is minimal.
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Most financing companies advance between 70% and 90% of the invoice value upfront. The remaining amount, minus fees, is paid once the invoice is settled by the customer.
Related Resources to AR Financing
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