7 Undeniable Reasons to Use Accounts Receivable Financing

5 min read • Jul 31, 2021 • Grant Olsen

Have you heard of accounts receivable financing? Sometimes known as factoring, this type of financing is increasingly popular due to its speed and efficiency. If you’ve faced rejection from lenders in the past, you should devote a long look at accounts receivable financing.

The relevance of accounts receivable financing is tied to the massive number of unpaid invoices weighing down our nation’s small businesses. You’ve got them. I’ve got them. We’ve all got invoices that are just sitting there, waiting to be resolved. And they aren’t doing us any good until the payment finally rolls in.

“Extending credit to your customers is a normal part of doing business,” explains small business expert William Adkins. “It is also a good way to increase revenue and build your customer base. However, when you carry a significant amount of sales as accounts receivable on your books, those funds are not available for other uses. Financing receivables, better known as accounts receivable financing, is a way to quickly convert receivables into cash…When you use accounts receivable financing, also called invoice financing, you sell the unpaid invoices of customers to a factoring company. Once a shipment is delivered and the customer is invoiced, the factoring company advances 70% to 90% of the value of the invoice.”

The distinct structure of accounts receivable financing makes it stand out from most other types of small business financing. In some ways, it has more in common with the sale of an asset than it does with a traditional loan. But the result is the same, as you’re provided with the cash needed to run your business.

Let’s look at 7 undeniable reasons to consider accounts receivable financing for your business.

1. It Removes the Burden From Your Shoulders

Nobody likes to track down those who owe them money. I had a paper route in high school and even now, after 24 years, there’s nothing in life that I’ve hated more than when I had to go knocking on the doors of my customers each month to ask them to pay me for their paper. It was tedious, frustrating, and sometimes even dangerous. With accounts receivable, a factoring company does all the dirty work for you. They’re experts at collecting money and can do it faster than you ever would!

2. It’s Easier to Qualify

There are certain types of small business loans with high rejection rates. The good news is that with accounts receivable financing, the lender is receiving something valuable from the onsetthis lowers the risk and makes lenders more willing to work with you.

3. Your Credit Score Won’t Be Scrutinized

When a factoring company is deciding whether or not to approve your request, they’ll focus on the financial health of the customers who owe you money (since that’s the key to them getting paid). The credit score of your own business might not even enter the picture. This means that you probably won’t have your credit pulled, which can help keep your score healthy.

4. You Can Actually Build Your Credit Score

When you have a healthy cash flow, you’re better able to meet your financial obligations. This means more prompt payments to your suppliers, partners, and landlords. The ultimate result is a boost to your credit, which opens the door to more attainable and affordable financing in the future.

5. There’s No Need to Risk Collateral

The lower risk associated with accounts receivable financing also means that you won’t need to put up your personal belongings as collateral. This can be a huge deal, as other types of small business financing often require you to provide collateralwhich increases your personal liability.

6. Money Comes Fast

There are times when your business requires expedited funding, meaning the weeks-long approval processes of SBA loans simply won’t cut it. With accounts receivable financing, you can access your money in as little as 24 hours to boost your cash flow.

7. There’s No Need to Worry About Repayment

Speaking of financial obligations, accounts receivable financing is nice because it doesn’t add to your list of monthly payments. The factoring company is compensated through their work tracking down your unpaid invoices, so you don’t need to worry about paying them a dime.

Finding the Best Accounts Receivable Financing

Just as there are good business term loans and bad business term loans, you’ll also find a range of quality among factoring companies. With a great company, you might get 80% of the value for your unpaid invoices. A less generous company might only offer 60%.

Likewise, the best factoring companies provide good customer service and will help you navigate the process. Watch out for others that are only interested in your invoices and won’t provide the support you need.

As for which exact financing product is best, there are a few kinds of accounts receivable lending to consider. Let’s look at the key differences.

  • Accounts Receivable: This is one of the most common versions, also known as factoring. After selling your purchase orders and accounts receivables, you receive upfront cash and also a cut of the payments collected.
  • Purchase Order Financing: These loans are secured with a contract or purchase order, paying for the inputs necessary to ship or produce a product or deliver on a service.
  • Inventory Financing: You can acquire a revolving line of credit for your business with this asset-based form of lending. Your inventory serves as collateral.
  • Single Invoice Factoring: When short-term money is needed, you can advance the payment of your customers’ purchases to increase your cash flow.

Which type of accounts receivable lending is right for you? That totally depends on your unique circumstances and strategies. Make sure to consider all the options and take the time to do your due diligence—then you’ll be in a position to make an informed decision that allows you to proceed with confidence.

Grant Olsen

Grant Olsen is a writer specializing in small business loans, leadership skills, and growth strategies. He is a contributing writer for KSL 5 TV, where his articles have generated more than 6 million page views, and has been featured on FitSmallBusiness.com and ModernHealthcare.com. Grant is also the author of the book "Rhino Trouble." He has a B.A. in English from Brigham Young University.