Accounts Receivables financing, or AR financing, is a method in which a small business owner can borrow money against his or her future accounts receivables. This type of funding can be very helpful to a small business that has met an unexpected financial need or is looking to expand but does not have the cash on hand to do so. Learning about AR funding is the first step toward understanding whether it would be advantageous for you.
The Basic Concept
You run a business and you bill your customers and vendors on a regular basis. They pay their invoicing and you book this money as accounts receivables. These customers and vendors are regular clients that are on a monthly billing cycle. In other words, you know you’ll be invoicing them for a set amount each month.
Because you know this, you can count on this money coming into your business. Unless something goes wrong, you’ll be billing X amount of dollars each month and receiving X amount of dollars each month. This gives you “collateral,” so to speak, that you can use to borrow money against, much like a piece of equipment that you own with a set value.
The Lender’s Role
A lender will review your books to see your anticipated accounts receivables. He or she will then use this data to confirm that those paying your receivables are reliable and credit worthy. With AR financing, you do not have to go through a traditional loan application process; it is people who are paying you that are in question, not your own credit score.
Your Role
Once you receive the money, you will be responsible for turning over a percentage of your accounts receivables to your lender in order to pay back the loan. The payment duration, interest rate, and the percentage varies, but the lender will work with you so you do not take a huge hit to your bottom line, as you won’t be receiving your entire monthly receivables; a portion will go toward your loan payments.
How it Helps You
When taking out a traditional loan, the bank may require you to use the funds for a specific expense; this is not the case with AR financing. Whether you need the cash to meet payroll, to cover an unexpected financial emergency, or you are ready to expand, the AR lender will not have a say on how you use the funds. This is one of the best ways AR funding helps small businesses. It gives you the cash you need without unnecessary restrictions.