Can AR Financing Help Your Business?

If you’ve been in business for more than a day, you know that it presents new challenges all the time. The more you grow, the more expenses you have. When your customers pay on time and everything runs smoothly, damage control is probably the last thing on your mind. Sometimes you need working capital and your income just doesn’t meet your current needs. Whether it’s because of slow-paying customers, the weather or any of one million other possible scenarios, your business could find itself in a slump or worse, in the red. AR Financing may be a way to stay afloat during the storm.

If you open for business and your service or product really takes off, you might find yourself in need of bigger or faster equipment. Sometimes, all it takes is a broken pipe or a misprint on your website. If you need cash fast but your outstanding invoices aren’t due for another three weeks, there’s a way to get the funds you need. In the event that you can’t procure a regular loan, AR Financing is a loan process that uses your existing receivables as a type of collateral.

Let’s say you have $25,000 worth of invoices due. Before you can collect those payments, you’re going to need $10,000 worth of inventory to complete a job due next week. Take your invoices to an AR Financing company. They will sit down with you and assess your needs. If you agree to their fees and terms, they will typically have you fill out an application and then they’ll check your credit. It’s typical for them to check the creditworthiness of your clients and sometimes, your aged receivables and accounting records.

If you’re approved for the loan, the finance company might advance you 80 percent or more toward your invoice total. In this case, if you are approved for 80 percent, you’ll get $20,000 to use for that inventory. The remaining $5,000 from the invoice will be held in reserve. The AR Financing company will take their fees out of the reserve money and give you the remainder once the clients pay their invoices.

Most financing companies will charge a small percentage, around 3 percent, as an initial processing fee. They could charge another small percentage of the initial invoice total for each week the invoices are left unpaid until their due date. If the company charges 1 percent, or $250 per week, this would amount to $750 for processing and another $750 for financing. The $1,500 would be subtracted from the $5,000 reserve, leaving you with a return of $3,500.