Too many unpaid invoices can affect business growth. But for many small business owners, a pile of outstanding invoices is a stark reality. If you also struggle to keep your head above water due to accumulated accounts receivable, you can opt for accounts receivable financing to improve cash flow in your business.
What is debtor financing?
Accounts receivable financing, also known as invoice financing, is a type of financing option that gives you access to money on your outstanding invoices. A debt financing company provides you with a capital up to 100% of your total outstanding invoice value for a fee.
In other words, accounts receivable financing (AR) can help small business owners get paid early on their outstanding invoices in exchange for a fee.
Accounts receivable financing should not be confused with invoice factoring. You sell unpaid invoices at a discounted price in invoice factoring, and the invoice factoring company takes full ownership of unpaid invoices and collection payments.
How does debtor financing work?
This is how debtor financing works:Your clients owe you $13,000. The amount of financing can depend on several factors such as your industry type, personal and business credit score, etc. You pay a weekly fee to the company until your clients have paid their dues
With debtor financing, your customers pay directly to your debtor company. And the company will pay you the remaining balance after deducting its fee and other applicable charges listed in the accounts receivable financing agreement.
Simply put, accounts receivable financing is a type of business loan that has your outstanding invoices as collateral.
Benefits of debtor financing
Here are the main advantages of debtor loans over getting loans from traditional lenders:Quick and easy application process No collateral required Minimal paperwork Flexibility to choose the amount of capital based on your company’s unpaid invoices
The approval of accounts receivable financing often depends on the credit history of your customers. Companies with poor creditworthiness can therefore also qualify for debtor financing.
Debtor financing costs
The total cost of financing for debtors varies greatly from company to company. There are often two types of costs associated with debtor financing: the service fee and the interest. Sometimes companies also charge invoice validation fees.
So it is recommended that you get quotes from multiple companies to choose the most economical option.
Is accounts receivable financing right for your small business?
Accounts receivable or invoice financing can help small businesses improve cash flow, hire additional employees, purchase new equipment, build cash reserves and improve overall financial health. But is it right to cover your small business expenses?
Here are the critical questions to ask before applying for an accounts receivable loan:Do you need immediate capital to meet seasonal demand? Are you dealing with cash flow problems due to a pile of unpaid invoices? Are the costs of advances higher than the costs of debtor financing? Are you unable to pay daily operating expenses?
You need to understand that debtor financing can be more expensive than any other type of business loan. So, before applying for an accounts receivable loan, you should first check all available financing options, such as business credit cards, traditional bank loans, and micro loans.
Also read these 11 ways to better manage your accounts payable and accounts receivable to improve cash flow in your business.
Top debtor finance companies
Here are the top accounts receivable finance companies to consider:
1. 1st Trade Credit
1st Commercial Credit is a leading invoice financing and factoring company. With more than 3,400 clients funded, 1st Commercial Credit offers a wide range of financing solutions to help small businesses improve cash flow and provide financial protection during difficult times.
You can set up your accounts receivable financing account in 3 to 5 days. The company charges financing costs from 0.69% to 1.59%
If you run a SaaS business, Pipe could be your ideal choice to access working capital. It offers instant one-click payout. The company helps you convert your recurring earnings into upfront capital.
3. Fund Through
If you use a QuickBooks Online account in your business, FundThrough can be one of the best options for invoice financing. Express invoice financing means you have capital the next business day. In addition, you can get 100% of your invoice amount as financing. And the process is completely online.
FundThrough is great for financing up to $15,000
Lendio offers a wide range of loans to business owners, including SBA loans, business lines of credit, cash advances to merchants and much more. With Lendio, you can get capital up to 90% of debtors.
If you are a seller in the state of Illinois, PayPlant can be your ideal partner for invoice financing. The company offers rates starting at 1.2% per month for businesses and app developers. And there are no fees or fees for sellers in the state of Illinois.
Crestmark is specialized in offering various financial solutions for companies. The company claims to pay out funds to eligible borrowers within one business day. Crestmark allows you to receive up to 90% of eligible invoices.
7. TCI Working Capital
TCI Business Capital is a well-known name in the market, offering monthly financing programs ranging from $50,000 to $7 million. The company serves the transportation, manufacturing, oilfield service businesses and much more. By partnering with TCI Business Capital you can receive same day financing for your outstanding invoices.
altLine is one of the leading invoice financing and factoring companies. The company claims to provide easy approval for its lending options. As a bank, altLine can reduce borrowing costs.
What are examples of debtors?
Here’s an excellent example of accounts receivable: a customer purchases goods worth $12,000 and pays $7,000 upfront and agrees to pay the balance after 30 days. You show $5000 as accounts receivable on your balance.
What are the common forms of financing receivable?
The most common forms of accounts receivable financing are invoice financing and invoice factoring. Invoice financing or accounts receivable financing is a way of getting capital from your unpaid invoices in exchange for a fee, where invoice factoring means you sell your outstanding invoices (lower than their sales volume) to get money.
Now you know everything about debtor financing and how it works. It’s time to learn how to get a small business loan. You must, of course, submit documents before applying for any financing. Reading a complete guide to the small business loan documents you need can help you significantly in the documentation process.
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