AR financing is usually offered by online lenders and fintech companies. Top options include altLINE and Porter Capital.
Updated Apr 2, 2024 · 3 min read Written by Randa Kriss Lead Writer Randa Kriss
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Randa Kriss is a lead writer and NerdWallet authority on small business. She has nearly a decade of experience in digital content. Prior to joining NerdWallet in 2020, Randa worked as a writer at Fundera, covering a wide variety of small-business topics and specializing in the lending and banking spaces. Her work has been featured in The Washington Post, The Associated Press, MarketWatch and Nasdaq, among other publications. She has also hosted a webinar as part of the SBA's 2024 National Small Business Week Virtual Summit. Randa is passionate about helping small-business owners make educated financial decisions, especially when it comes to affordable funding. She is based in Chicago.
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Accounts receivable financing, or AR financing, can be a good option if you need fast funding to cover cash flow gaps or pay for short-term expenses. Because AR financing is self-securing, it can also be a good choice if you can’t qualify for other small-business loans .
Here’s what you need to know about how accounts receivable financing works and some of the best options for small businesses.
We’ll start with a brief questionnaire to better understand the unique needs of your business.
Once we uncover your personalized matches, our team will consult you on the process moving forward.
Accounts receivable financing, also known as invoice financing or invoice discounting , allows businesses to borrow capital against the value of their accounts receivable — in other words, their unpaid invoices. A lender advances a portion of the business's outstanding invoices, in the form of a small- business loan or line of credit, and the invoices serve as collateral on the financing.
With accounts receivable financing, a lender advances you a percentage of the value of your receivables, potentially as much as 96%. When a customer pays their invoice, you receive the remaining percentage, minus the lender’s fees.
Accounts receivable financing fees are typically charged as a flat percentage of the invoice value, and generally range from 1% to 5%. The amount you pay in fees is based on how long it takes your customer to pay their invoice.
Here’s a breakdown of how the process works:
You apply for and receive financing. Say you decide to finance a $50,000 invoice with 60-day repayment terms. You apply for accounts receivable financing and the lender approves you for an advance of 80% ($40,000).
You use the funds and the lender charges fees. After receiving the financing, you use it to pay for business expenses. During this time, the lender charges a 3% fee for each week it takes your customer to pay the invoice.
You collect payment from your customer. Your customer pays their invoice after three weeks. You owe the lender a $4,500 fee: 3% of the total invoice amount of $50,000 ($1,500) for each week.
You repay the lender. Now that your customer has paid you, you’ll keep $5,500 of the customer’s payment and repay the rest to the lender (the original advance amount, plus fees for a total of $44,500). You paid a total of $4,500 in fees, which calculates to an approximate annual percentage rate of 65.7%.
Because accounts receivable financing companies don’t charge traditional interest, it’s important to calculate your fees into an APR to understand the true cost of borrowing. APRs on accounts receivable financing can reach as high as 79%.
Accounts receivable financing is often confused with accounts receivable factoring , which is also referred to as invoice factoring . Although AR financing and factoring are similar, there are differences.
With invoice factoring, you sell your outstanding receivables to a factoring company at a discount. The factoring company pays you a percentage of the invoice’s value, then collects payment directly from your customer. When your customer pays, the factoring company gives you the rest of the money you’re owed, minus its fees.
With accounts receivable financing, on the other hand, your invoices serve as collateral on your financing. You retain control of your receivables at all times and collect repayment from your customers. After your customer has paid their invoice, you repay what you borrowed from the lender, plus the agreed-upon fees.
Invoice factoring can be a good financing option if you don’t mind giving up control of your invoices and you can trust a factoring company to professionally collect customer payments. If you’d rather maintain control of your invoices and work directly with your customers, AR financing is likely a better option.
Accounts receivable financing is usually offered by online lenders and fintech companies, many of which specialize in this type of business funding. Certain banks offer AR financing as well.
If you’re looking for a place to start your search, here are a few of the best accounts receivable financing companies to consider.
A division of the Southern Bank Company, AltLINE is a lender that specializes in AR financing. AltLINE offers both accounts receivable financing and invoice factoring, working with small businesses in a variety of industries, including startups and those that can’t qualify for traditional loans.
AltLINE offers advances of up to 90% of the value of your invoices with fees starting at 0.50%. To get a quote from AltLINE, call a representative or fill out a brief application on the lender’s website. If you apply online, a representative will contact you within 24 hours.
AltLINE’s website also contains a range of articles for small-business owners, covering AR and invoice financing, payroll funding, cash flow management and more. AltLINE is accredited by the Better Business Bureau and is rated 4.8 out of 5 stars on Trustpilot.
1st Commercial Credit offers accounts receivable financing in addition to other forms of asset-based lending , such as invoice factoring, equipment financing and purchase order financing . The company works with small- and medium-sized businesses, including startups and businesses with bad credit.
With 1st Commercial Credit, you can finance $10,000 to $10 million in receivables with factor rates ranging from 0.69% to 1.59%. You can start the application process by calling a sales representative or filling out a free quote form on the company’s website. After your application is approved, it can take three to five business days to set up your account and start receiving funding.
1st Commercial Credit is accredited by the Better Business Bureau and has an A+ rating.
Porter Capital is an alternative lender specializing in invoice factoring and accounts receivable financing. The company also has a special division, Porter Freight Funding, which is dedicated to working with businesses in the transportation industry.
With Porter Capital, you can receive an advance of 70% to 90% of your receivables depending on your industry. You can provide basic information about your business to get a free quote, apply online and receive funding in as little as 24 hours. Although Porter Capital isn't accredited by the Better Business Bureau, it does have an A+ rating; the company also has 3.7 out of 5 stars on Trustpilot.
Although AR financing and factoring are distinct, many companies blur the lines between the two. As you compare options, make sure you understand the type of financing a lender offers.
If you decide that invoice factoring may be a fit for your business, you might consider factoring companies like FundThrough, ECapital or RTS Financial.
The best business loan is generally the one with the lowest rates and most ideal terms. But other factors — like time to fund and your business’s qualifications — can help determine which option you should choose. NerdWallet recommends comparing small-business loans to find the right fit for your business.
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Randa Kriss is a small-business writer who joined NerdWallet in 2020. She previously worked as a writer at Fundera, covering a wide variety of small-business topics including banking and loan products. Her work has been featured by The Washington Post, The Associated Press and Nasdaq, among others. Randa earned a bachelor's degree in English and Spanish at Iona College. See full bio.
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