What SMBs Need to Know About Accounts Receivable Financing in 2022

What problem does accounts receivable financing solve?

There’s a reason B2B companies seek out AR financing. Accounts receivable financing solves a cashflow problem. When you provide a good or service to one of your customers, you give them an invoice. The net terms indicated on your invoice statement will state how long your customer can take to pay. It is often agreeable to your customers to take longer to pay; issuing net terms of 30, 60, or 90 days can help attract large accounts. But, during that time period, businesses can have cashflow shortfalls.

For example, if your customer has an outstanding invoice of $10,000 dollars, but they will not pay for another eight weeks, you might be short for this month’s payroll.

Accounts receivable financing works by filling that gap: an accounts receivable financing company will issue a loan to the vendor for most—often up to 90%—of the value of the unpaid invoice. After the customer passes their credit check, you have $9,000 to cover your business expenses.

Then, when the customer pays their invoice, the AR financing company charges their fee, and pays the vendor the remaining amount. This process is often called invoice discounting. Alternatively, the vendor can sell their invoice to a factoring company, in a process called invoice factoring.

Accounts receivable financing options: factoring or discounting?

Accounts receivable financing options: factoring or discounting?

There are two main options for accounts receivable financing, invoice factoring and invoice discounting.

  1. AR invoice discounting

Invoice discounting is a type of financing, where you receive a loan upfront for the value of the invoice that your business has issued to your customer. Once the customer pays the invoice, you pay the invoice discounting lender back with fees and interest. You, the business owner, are still responsible for collecting the invoice payment and for repaying the lender.

  1. AR invoice factoring

Invoice factoring, also called accounts receivable factoring, is rather the purchase of your outstanding invoice at a discounted rate. A factoring company will pay you a certain amount for your invoice, and then assume responsibility for collecting that invoice.

Think of discounting as asset-based lending, in which your invoice is the asset that the lender buys.

Which is preferable?

The difference may seem subtle, but can involve a very different experience for your customer. When companies retain invoice factoring companies, they are giving up control of their accounts receivable processes to a third party. The choices that the factoring company makes are out of your hands.

If, for example, the factoring company decides to pursue aggressive methods of invoice collection, your customer may be less likely to work with you in future. It is possible to avert this outcome by opting for invoice discounting instead. In these arrangements, you have been extended a loan for a partial value of an invoice, and the responsibility is on you to effect the repayment.

You therefore continue to manage your customer interactions. Chasing invoices is your responsibility, but you have full control of the methods employed in collection. Invoice discounting keeps cash on your balance sheet, while also giving you the room to preserve your customer relationships.

Factoring is useful if your accounts receivable department has no bandwidth for invoice collection. To maintain personal customer rapport, however, most companies opt for discounting.

Other issues plague factoring as well: read about these 8 common problems with invoice factoring.

A note on customer service

There are opportunities to improve the customer experience of both discounting and factoring systems using new innovative platforms. For instance, with Resolve’s digital net-terms as a service offering, the customer is always kept top of mind.

Resolve’s relentless focus on customer experience leverages automation to take the contention out of collection. A customer portal, which is tailored for a company with its branding, gives customers clarity around their payment deadline, many options for payment type, and humane reminders of upcoming payments.

We chase payments so you can chase opportunity. We keep your customers content so you can count on their business long-term.

What are the benefits of accounts receivable financing?

Accounts receivable funding is not only effective for managing cashflow problems: they are also an effective tool for business growth.

Imagine getting a new customer whose account would dramatically increase your total transaction value. You can produce their order, but it will empty your business bank account to do so. You have other loyal customers whose orders you also need to produce. How can you say yes to the new business?

Invoice financing will allow you access to the working capital you need. You can take the new account, and maintain the cashflow you need to produce for your existing customers.

What type of business is accounts receivable financing for?

It is often larger companies that can leverage these financing solutions to scale, ones with established customer bases. The established solutions—factoring and discounting—are sometimes inaccessible to SMBs because of high interest fees.

Factoring companies often also receive a significant discount on the value of the invoice. For providing the cash upfront, a factoring company will receive the invoice for generally around 80-90% of its value. Does your business have the flexibility to lose as much as 20%? Small businesses often do not.

Established factoring companies like Triumph and Altline are great sources of funding if you can afford the associated fees. SMBs, however, are unclear on how much they will actually be paying in accordance with their financing agreement. Interest rates are not necessarily static, and long net terms can lead to exorbitant fees over time.

When searching for accounts receivable financing, make sure you understand the interest rates stated in your financing agreement. As an example, Resolve’s digital-net-terms rates are clearly stated on the website.

Whose credit matters in AR financing: vendor or customer?

When an accounts receivable financing lender checks credit, they are generally checking the credit rating of the customer, since the loan is effectively issued on the customer’s behalf.

The creditworthiness of the customer will often determine the percentage of accounts receivable funding available to the vendor.

This is not to say that your company’s credit score is unimportant. Your AR lender could assess your credit history when you initially apply.

Your customers, however, may have a negative experience of your credit verification process. Legacy factoring processes will affect your clients’ credit scores. This could easily sour the relationship you worked so hard to sweeten by offering net terms.

When your AR financing provider verifies your customers’ credit histories, you additionally benefit from a better understanding of your credit profile. When selecting your AR lender provider, look out for a company that offers simple customer credit score verification and business credit checks.

Performing in-house credit checks without the aid of an outsourced fintech solution or expert is difficult. This is why in-house teams should not be doing business credit checks. You need a standardized process, grounded in mathematics and computing, to accurately understand your credit risk exposure. Issuing credit too readily could pose a serious risk; not issuing enough could impact your ability to attract and retain new clients. The best practice is to investigate credit assessment software solutions before issuing credit to new customers.

Read more about credit risk management here.

What are net terms, and how do they benefit businesses?

Net terms indicate when payment on an invoice is due. They define the period that your customer can take to pay you for the good or service you have provided. Net terms will often be written as: Net 30, Net 60, or Net 90. The numbers indicate how many days the client may take to pay—Net 30 indicating 30 days, and so on.

Companies offer their customers net terms to capture new business opportunities. Offering net terms can be just as impactful as pricing.

Read more about understanding net terms here.

Are there small business financing options that achieve the same results?

Are there small business financing options that achieve the same results?

Small business owners will be pleased to know that another solution exists. Digital net-terms as a service is a novel solution that solves the problems inherent to accounts receivable loans.

Resolve, a digital-net-terms and B2B accounts receivables solution, offers short term funding without the customer service qualms typically produced by invoice factoring and discounting.

While some companies improve cash flow by selling accounts receivables, offering net terms also increases cashflow availability. Resolve unlocks working capital by offering options to receive cash advances worth 50, 75, or 90% of the invoice based on the customer’s credit score. Resolve’s technology performs “quiet” credit checks, meaning your customers’ credit scores are unaffected when they are verified.

Plus, you get the benefit of net 30, 60, and 90 terms. Your business may be small, but let your accounts be large, with roomy net terms.

Moreover, you can receive up to 90% of your invoice, better than a line of credit, within 24 hours. Delays of a few days, a week sometimes, are common with legacy AR financing loans. Resolve understands the value of haste to SMBs and startups which is why they are in the business to make your business easier.

Recourse vs. non-recourse factoring and financing

Recourse factoring and non-recourse factoring are two different lending arrangements provided by accounts receivable financing companies. Recourse factoring indicates that, if a customer does not pay their invoice, the business is liable to the lender for the value of the invoice, even after they have sold the asset.

Non-recourse factoring is the opposite: the lender assumes the risk, and will not pursue repayment from the vendor if their client does not pay their invoice.

Resolve is able to offer non-recourse financing because of their intelligent credit and risk approval systems. Not only is this already superior to factoring—since you do not pay the high costs associated with selling invoices—but risks are also significantly minimized.

The bottom line: what you need to know about accounts receivable financing

Cashflow is important to businesses at all stages of development. Offering net terms is a great way to attract and retain customers, but reduces liquidity. Accounts receivable financing is a traditional method of receiving cash advances for invoices. Digital net terms is beginning to replace AR financing because of the procedural improvements it makes to credit verification, payment processing, and customer service. Whatever method you select for your business, it is important to conduct extensive research.

Ready to look past accounts receivable financing? Resolve is an innovative new solution that will elevate your accounts receivables and payments workflow while giving you even better benefits than AR financing. Learn how an industry leading B2B supplier used Resolve to transform their accounts receivable operations.


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