Need Extra Capital? Try AR Financing!

Anyone who has ever started their own business knows that it can be rough in the beginning. When customers don’t pay you on time, your invoices pile up. Without that income, your cash flow might not be able to keep up with the needs of your business. Expenses like payroll, taxes, utilities and inventory purchases need to be paid on time so you can keep serving your customers. Vendors will only extend a certain amount of credit, if any at all, so your capital needs to keep you afloat. Sometimes, even businesses that have been successful for decades can have a downturn or an incident that causes sales to take a bit of a dive. This is where AR Financing comes in.

AR Financing, also known as invoice financing, can rescue you from the mounting debts and give you time to collect from your customers. You can get peace of mind while you catch up and keep the doors open for incoming business. The company that does the financing for you essentially “buys” your past-due invoices. Typically, you could get an 85 percent exchange rate for these collectable debts. The other 15 percent stays in a reserve state. The finance company collects their fee from the reserve, usually around 3 percent. Each week, they will charge what is known as a factoring fee of about 1 percent until your customer pays the invoice. If any reserve amount is left over, you will receive the balance after all of the company’s fees have been deducted.

Using the above scenario, if you sell invoices totaling $10,000 to the financing company, they would give you $8,500. $1,500 would be held in reserve. If your customer pays their invoice one week after the financing was completed, the finance company subtracts their processing fee of 3 percent, or $300, plus the factoring fee of 1 percent (for that one week) of the total invoice purchased. In this example, that fee would be $100. You would receive the remainder, which is $1100. In essence, you are getting a “loan” of $8,500 and a “rebate” of $1,100, totaling $9,600. The AR Financing might have cost you $400, but the purpose of it was to prevent what could have been much more expensive.

Not everyone qualifies for AR Financing, but the usual parameters are that you have to be a B2B business model. You must have outstanding receivable invoices, and the maximum will depend upon your credit rating and the type of invoices you have. Make sure your credit is healthy to receive the best chance of getting capital from this type of financing.