Do You Have Financing Based on Your Accounts Receivable Without Even Knowing It?

October 23, 2019

You’ve got repeat customers and your sales funnel looks good. Smooth sailing, right? Whether it’s to stay on the same growth trajectory or to cover costs, a lot of businesses seek out financing. The challenge we’ve seen is that a lot of business owners are so happy to get a deal done, that they aren’t clear what the financing deal is secured against.

To put it another way: Someone is providing you money based on something of value either you or your business owns. It could be just a ‘personal guarantee’, which means your financing is secured against everything you personally own. Another option for a growing B2B business is getting your financing secured against your Accounts Receivable (AR).

Financing Based on your Accounts Receivable (AR)

“Invoice based” or “AR-based Financing” sounds very serious, very adult, but it’s really pretty simple. 

What it means: You’re using invoices as collateral for a loan. Or in the case of invoice factoring, you’re selling an invoice outright with no loan involved. 

Sticking with the example above, you’d be receiving funding in exchange for the invoices of the 10 new sales rather than waiting for 30, 60, 90+ days. 

In the realm of AR financing, there are a few different options you can choose from.

First: The “OG” – Accounts Receivable Factoring

Here’s how it works. You make a $100,000 sale, but it’s going to take 30-60 days to actually get paid by your customer. 

So you take the invoice over to the factoring company. Most factoring companies operate on an 80/20 rule, so they’ll pay you 80% right away (after verifying who the customer is, that you have invoiced the customer for the product/service you delivered, etc.) And then, when the factoring company gets paid the $100,000 by your customer, the factoring company will give you the other 20% you earned minus their fees. 

This is a solid option for small to medium-sized businesses as a way to stabilize the cash flow coming in, especially if you’re trying to fund your own growth after you landed big new deals. You avoid having the stressful ups-and-downs that so many business owners face. 

One more thing, another benefit of this option is you don’t have to show three years (more like a decade) of being in business to to receive financing like when you’re working with a traditional bank. It doesn’t matter if your business is six months old. If you’re able to present the factoring company with invoices from reputable customers and you can prove that you delivered, that’s all that matters. The funding isn’t based on anything else. It’s that simple.

Second: AR Line of Credit

Think of it as a credit card. The bank/lender gives you a credit limit that you can’t go over. You are then charged interest, or a financing fee, or a premium, or prime rate, (don’t worry about all of these different terms, it’s all the same thing), based on how much of the credit line your business has used. Just like a credit card; you have to keep an eye on your outstanding balance. Don’t want to run up the total. 

A similarity between factoring and an AR line of credit is that they both have to do with your outstanding invoices. A big difference is that a line of credit is a loan taken out against the entirety of your outstanding AR as opposed to factoring where you have sold an outstanding invoice in return for an advance on that invoice. Other sources collateral for non-AR lines of credit is your commercial or even personal real estate, machinery, money in the bank, or inventory. 

And, since it’s a bank, this is definitely harder to secure a line of credit. They’ll check your credit score. Look at overall cash flow. They will want to see how many years you have been in business. With an AR line of credit, there will be constant paperwork too because the amount of credit available to you will align with your outstanding AR. Get ready for monthly bank checkups whether you’re using your AR line of credit or not!

Watch out – One important detail: A lot of banks will require you to pay the full balance of the line – potentially every year. If you can’t do it, that’s when you have to start selling off other collateral. 

Also, watch out – Both banks and a lot of factors require a personal guarantee. It sounds like a handshake deal (“I guarantee it”) where it’s actually a clause where the financer can go after your personal assets if your business assets can’t cover non-payment.

There are a few growth partners like FinanceFuel that don’t require a personal guarantee and don’t even run a personal credit check. Our underwriting process is streamlined to factor your invoices at the speed of business.

Share: