What is Accounts Receivable Financing?

Instead of waiting around for customer invoice payments or risking commercial assets, you can make good use of accounts receivable financing. This financing gives you cash upfront that would usually be tied up in unpaid invoices for 30, 60, 90, or even 120 days, or you can use your outstanding invoices as collateral to apply for a loan.

Improve cash flow, remove money worries, and keep business operations running smoothly. Learn more about how accounts receivable financing works, the pros and cons, and how to apply for it.

What is accounts receivable financing?

Accounts receivable financing is an umbrella term that describes funding you can access by using your accounts receivable. It’s a funding arrangement where your business can either use its outstanding customer invoices to quickly unlock funds instead of waiting for the full invoice payment terms, or use your invoices as collateral to secure a loan or line of credit.

How does accounts receivable financing work?

There are a few types of accounts receivable funding: factoring, discounting, asset-based, and selective receivables financing.

The main difference between factoring and discounting is that with invoice factoring, you sell your invoices to the factoring company, giving them the headache of chasing payment from customers. And invoice discounting is where you remain in charge of your credit control.

You pay higher fees for factoring because the factoring company takes on a higher risk as the credit controller. If the customer doesn’t pay the invoice, it’s their problem. Alongside lower fees, discounting is a popular option for businesses that don’t want customers to know they’re working with a financing company. This can tarnish brand image, whether you’re financially struggling or not.

Selective receivables financing involves selling one unpaid customer invoice to a factoring company in exchange for almost immediate funds. Then, when the customer pays the invoice, the factoring company sends the remaining balance, less their fee, to your business bank account.

Asset-based financing uses your invoices as security so you can apply for a loan or a business line of credit. You remain in control of chasing customer payments, and you repay the lender in line with their terms and interest, just like any traditional business loan.

The benefits of accounts receivable funding

Access funds quickly

Once the lender sets you up on their digital platform, you can upload invoices and receive payment almost immediately. It’s a great way to access a quick injection of cash as and when you need it.

Good option for bad credit

For factoring and discounting financing, it’s not you that the lenders are concerned with. They’re more interested in credit checking your customers to ensure they’re reliable and will pay their invoice on time. So if you have bad credit, accounts receivable financing could be a good funding option.

No additional collateral needed

The invoices become your collateral to secure the funding. This means you don’t need to risk your commercial property, vehicles, or other commercial assets to access funding.

The disadvantages of accounts receivable factoring

It can be costly

When comparing accounts receivable financing to other forms of lending, like traditional business loans, the fees are quite high, particularly if you use a factoring company, as they take on the risk of chasing customers for payment. Fees vary but are usually around 1%-5% of the invoice value.

It can affect customer relationships

If you’re using a factoring company to collect customer payments, this can cause some friction from your customers. They might not appreciate being relentlessly chased for payment. Using a factoring company can also cause problems with brand perception; it might look like your business is struggling financially, even when it isn’t.

You can become overly reliant on finance

Once you’re set up with the factoring or discounting company, it’s easy to use a digital portal to upload the invoices you want to borrow against. This means that having access to funds on tap can become an easy way to manage cash flow. However, this solution should only be used in the short term.

Choosing the right accounts receivable funding

Choosing the right business loan is always an important decision; that’s why you should weigh your options carefully. Accounts receivable financing can be a great way to plug short-term financial gaps, helping you better manage your cash flow. But it’s not a long-term solution.

Taking on debt is always a risk, but sometimes, it can be a strategic risk that helps you grow your business without draining personal funds or getting an investor on board.

Our free business comparison tool helps thousands of UK SMEs just like you access the capital they need to scale their business. Ready to start your business finance journey? Find and compare accounts receivable financing.