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Is Accounts Receivable Financing Right for Your Business?


November 19, 2019

Accounts receivable financing is one way business owners speed up payment on B2B invoices. Many or most invoices are Net 30(meaning the customer has 30 days to pay). Some may even extend out to 90 days or more. Waiting this long for payment can be difficult, even for businesses with a healthy number of clients.  

In a perfect world, your clients would just pay sooner. Or, in most cases, as soon as a project or service is completed. Client payments can be unpredictable, and companies have little recourse if a client doesn’t pay on time or at all. Some reports estimate that more than 91% of businesses suffer from late payments.   

Unfortunately, businesses that try to clamp down on late payments also run the risk of losing customers. Some of your clients might threaten going to a competitor who would “be happy to wait” 30 or more days to get paid. Depending on the size of your business, that one client could put a serious dent in your income.   

What’s the answer for businesses that need their money but don’t want to pressure clients for payment?  

This is where accounts receivable financing and accounts receivable factoring come in. Although they sound similar and are often used interchangeably, they’re different methods that can help you speed up payment on your B2B invoices. 

Accounts Receivable Financing is a Loan 

Getting approved for accounts receivable financing is similar to getting approved for a loan. Your lender, which might be a bank, AR financing company, or other institution, examines your company much like it would for any other loan.  

They look at your time in business, credit score, cash flow, debt, and other areas, and then decide whether you qualify. In this arrangement, your invoices are used as collateral against an advance to your business. These payments can take the form of a lump sum or a line of credit.  

With the lump sum payout, you’re given the money up front and pay down the balance with interest and fees over a period of months or years. With a line of credit, you’re still responsible for making monthly payments, but you’re also allowed to draw from the account as long as you stay below your limit, much like a credit card. 

Taking out a loan can be better if your business has good credit and is established. 

Because accounts receivable financing is a loan, many businesses won’t qualify because they don’t have good credit, or they haven’t been in business long enough. Even those that may qualify don’t always get approved for a large enough sum to cover their needs. For these reasons, AR financing typically works best for established businesses that have had time to build their credit. 

Accounts Receivable Factoring is Selling Your Invoices 

Accounts receivable factoring offers the same result  getting cash for your unpaid invoices — but instead of taking out a loan, you’re selling your invoices to the factoring company. Getting approved for AR factoring is easier because the factoring company doesn’t spend as much time evaluating your business. They’re getting paid by the same person you were — your client.   

The factoring company purchases your B2B invoices, gives you a lump sum payment, and then collects from your customers. That’s why they’re more concerned with your customers’ credit history than yours 

Once the customer pays, the factoring company pays any remaining money owed, minus a small fee for the service. 

A key difference between invoice financing and invoice factoring is the added value you get through the back offices provided by the factoring company. When you factor, you get your advance, but you also get help with invoicing, collections and even running credit checks on potential clients. If you are a large company with an accounting team, this may not be as important to you, but for the majority of small business owners wearing several hats, this can be a difference maker.  

Factoring is a debt-free alternative for businesses that won’t qualify for loans  

There are lots of reasons why businesses don’t qualify for loans. Time in business and credit are two primary reasons, but banks will shy away from businesses that aren’t diverse or only have a few customers. Because factoring isn’t a loan, your years in business and general financial situation don’t matter as much.  

You could have one large client that has strict 90-day terms. The money is good, but you have other expenses and vendors to pay during that time. Or, you could have a lot of clients of different sizes with different payment terms. Factoring helps keep your income predictable and steady by advancing you the money quickly.  

Get Started with Accounts Receivable Factoring with Triumph, formerly known as Triumph Business Capital 

If your business doesn’t qualify for loans or you don’t want to take on debt, invoice factoring may be the ideal solution to getting your B2B invoices paid fast. Get started with an instant funding rate quote now.