Accounts Receivable Financing and Factoring

Accounts receivable financing, also known as AR financing, allows companies to receive immediate funds for outstanding invoices. Companies using financing for accounts receivable (AR) can commit invoices to a funding partner for earlier payment.

Porter Capital believes in several particular benefits of accounts receivable (AR) funding. A company can increase its cash flow and avoid the strain of late payments. Taking a loan against receivables helps a company obtain cash without asking clients for immediate payment.

If a company is in high growth mode, young, or simply does not fall in a traditional bank box, they can utilize a loan or line of credit provided by Porter Capital.

Factoring

In today’s tight credit environment, more and more companies are turning to alternative and non-traditional financing options to access the capital needed to keep business running smoothly.

There are several tools available to owners of cash-strapped businesses in search of financing. Two of the most popular are factoring and accounts receivable financing (A/R financing). A lot of business owners lump the two together, but there are a few small yet significant differences.

Factoring is the outright purchase of a business’s outstanding accounts receivable by a commercial finance company or “factor.” Typically, the factor advances 70 percent to 90 percent of the value of a receivable when it purchases the receivable.

The balance, less the factoring fee, is released when the invoice is collected. The factoring fee-which is based on the total face value of the invoice, not percentage advanced-typically ranges from 1.5 percent to 5.5 percent, depending on aspects such as the collection risk and how many days the funds are in use.

Under a factoring contract, the business can usually pick and choose which invoices to sell to the factor-it is not typically an all-or-nothing scenario. Once it purchases an invoice, the factor manages the receivable until it is paid.

The factor will essentially become the business’s credit manager and accounts receivable department, performing credit checks, analyzing credit reports, and mailing and documenting invoices and payments.

Contact Porter Capital today to discuss where your business may fall in the percentage range.

Accounts Receivable Financing

Accounts receivable financing is more like a traditional bank loan but with several key differences.

While bank loans may be secured by different collateral, including plants and equipment, real estate, and/or the business owner’s personal assets, accounts receivable financing is backed strictly by a pledge of the business’s assets associated with the accounts receivable to the finance company.

Under an accounts receivable financing arrangement, a borrowing base of 70 percent to 90 percent of the qualified receivables is established at each draw against which the business can borrow money.

A collateral management fee (typically 1 percent to 2 percent) is charged against the outstanding amount, and when money is advanced, interest is assessed only on the amount of money actually borrowed.

Typically, to count toward the borrowing base, an invoice must be less than 90 days old, and the underlying business must be deemed creditworthy by the finance company. Other conditions may also apply.

As you can see, comparing factoring and accounts receivable financing is tricky. One is actually a loan, while the other is the sale of an asset (invoices or receivables) to a third party.

However, both have many similarities. Here are the main features of each option to consider before deciding which is the best fit for your company.

Factoring

  • Offers more flexibility than accounts receivable financing, because businesses can pick and choose which invoices to sell to the factor.

  • Fairly easy to qualify for and is ideal for new and financially challenged companies.

  • Has a simple fee structure that helps the company track total costs on an invoice-by-invoice basis.

Accounts Receivable Financing

  • Generally, less expensive than factoring.

  • Tends to be easier to transition from accounts receivable financing to a traditional bank line of credit when a company becomes bankable again.

  • Offers less flexibility than factoring, because the business must submit all of its accounts receivable to the finance company as collateral.

  • Typically requires a minimum of $75,000 a month in sales to qualify for, so may not be available to exceedingly small companies.

Financing Options

Both factoring and accounts receivable financing are usually considered transitional sources of funding that can carry a business through a time when it does not qualify for traditional bank financing.

After a period typically ranging from 12 months to 24 months, companies can often repair their financial statements and become bankable once again.

In some industries, however, companies continue to factor their invoices indefinitely – trucking is an example of an industry that relies heavily on factoring to keep its cash flowing.

How To Apply For Accounts Receivable Financing With Porter Capital

The application process is quick and easy. You can apply here directly through our website. Tell us about your business, tell us what you plan to use the funds for, send financials to complete your application, and we will review and get you funded in as little as 24 hours!