what is accounts receivable financing 
accounts receivable ar financing is a type of financing arrangement in which a company receives financing capital related to a portion of its accounts receivable accounts receivable financing agreements can be structured in multiple ways usually with the basis as either an asset sale or a loan understanding accounts receivable financingaccounts receivable financing is an agreement that involves capital principal in relation to a company s accounts receivables accounts receivable are assets equal to the outstanding balances of invoices billed to customers but not yet paid accounts receivables are reported on a company s balance sheet as an asset usually a current asset with invoice payment required within one year accounts receivable are one type of liquid asset considered when identifying and calculating a company s quick ratio which analyzes its most liquid assets quick ratio cash equivalents marketable securities accounts receivable due within one year current liabilitiesas such both internally and externally accounts receivable are considered highly liquid assets which translate to theoretical value for lenders and financiers many companies may see accounts receivable as a burden since the assets are expected to be paid but require collections and can t be converted to cash immediately as such the business of accounts receivable financing is rapidly evolving because of these liquidity and business issues moreover external financiers have stepped in to meet this need the process of accounts receivable financing is often known as factoring and the companies that focus on it may be called factoring companies the best factoring companies will usually focus substantially on the business of accounts receivable financing but factoring in general may be a product of any financier financiers may be willing to structure accounts receivable financing agreements in different ways with a variety of different potential provisions structuringaccounts receivable financing is becoming more common with the development and integrations of new technologies that help to link business accounts receivable records to accounts receivable financing platforms in general accounts receivable financing may be slightly easier for a business to obtain than other types of capital financing this can be especially true for small businesses that easily meet accounts receivable financing criteria or for large businesses that can easily integrate technology solutions overall there are a few broad types of accounts receivable financing structures asset salesaccounts receivable financing is typically structured as an asset sale in this type of agreement a company sells accounts receivable to a financier this method can be similar to selling off portions of loans often done by banks a business receives capital as a cash asset replacing the value of the accounts receivable on the balance sheet a business may also need to take a write off for any unfinanced balances which would vary depending on the principal to value ratio agreed on in the deal depending on the terms a financier may pay up to 90 of the value of outstanding invoices this type of financing may also be done by linking accounts receivable records with an accounts receivable financier most factoring company platforms are compatible with popular small business bookkeeping systems such as quickbooks linking through technology helps to create convenience for a business allowing them to potentially sell individual invoices as they are booked receiving immediate capital from a factoring platform with asset sales the financier takes over the accounts receivable invoices and takes responsibility for collections in some cases the financier may also provide cash debits retroactively if invoices are fully collected most factoring companies will not be looking to buy defaulted receivables rather focusing on short term receivables overall buying the assets from a company transfers the default risk associated with the accounts receivables to the financing company which factoring companies seek to minimize in asset sale structuring factoring companies make money on the principal to value spread factoring companies also charge fees which make factoring more profitable to the financier bluevine is one of the leading factoring companies in the accounts receivable financing business they offer several financing options related to accounts receivable including asset sales the company can connect to multiple accounting software programs including quickbooks xero and freshbooks for asset sales they pay approximately 90 of a receivables value and will pay the rest minus fees once an invoice has been paid in full loansaccounts receivable financing can also be structured as a loan agreement loans can be structured in various ways based on the financier one of the biggest advantages of a loan is that accounts receivable are not sold a company just gets an advance based on accounts receivable balances loans may be unsecured or secured with invoices as collateral with an accounts receivable loan a business must repay companies like fundbox offer accounts receivable loans and lines of credit based on accounts receivable balances if approved fundbox can advance 100 of an accounts receivable balance a business must then repay the balance over time usually with some interest and fees accounts receivable lending companies also benefit from the advantage of system linking linking to a companies accounts receivable records through systems such as quickbooks xero and freshbooks can allow for immediate advances against individual invoices or management of line of credit limits overall underwritingfactoring companies take several elements into consideration when determining whether to onboard a company onto its factoring platform furthermore the terms of each deal and how much is offered in relation to accounts receivable balances will vary accounts receivables owed by large companies or corporations may be more valuable than invoices owed by small companies or individuals similarly newer invoices are usually preferred over older invoices typically the age of receivables will heavily influence the terms of a financing agreement with shorter term receivables leading to better terms and longer term or delinquent receivables potentially leading to lower financing amounts and lower principal to value ratios advantages and disadvantagesaccounts receivable financing allows companies to get instant access to cash without jumping through hoops or dealing with long waits associated with getting a business loan when a company uses its accounts receivables for asset sales it does not have to worry about repayment schedules when a company sells its accounts receivables it also does not have to worry about accounts receivable collections when a company receives a factoring loan it may be able to obtain 100 of the value immediately although accounts receivable financing offers a number of diverse advantages it also can carry a negative connotation in particular accounts receivable financing can cost more than financing through traditional lenders especially for companies perceived to have poor credit businesses may lose money from the spread paid for accounts receivables in an asset sale with a loan structure the interest expense may be high or may be much more than discounts or default write offs would amount to 