2 Methods of AR Financing: Advantages for Small-Scale Firms

Many of the small-scale firms need financing through a reliable source as many of them do not have angel or equity investors as a feasible option or cannot successfully attain a bank loan. However, due to the need of additional working capital in order to meet their daily operational expenses easily, they can explore the option of procuring an account receivable (AR) finance program for help.

Provided by commercial finance institutions, AR financing is an effective alternative to bank financing. Some banks do have an option of providing AR loans to small sized firms, but they have very strict qualifying requirements that often hamper getting the funds your company needs (and quickly).

The owners of small-scale businesses can take AR financing through two methods that have been explained in detail to help you decide how to proceed.
  • Pledging Accounts Receivable
This method involves using your sales invoices to your customers as a collateral to get a fast funding for your business. It involves assigning over your account receivables to the lender company, while your company is still responsible for collecting money from your debtors and handing it over to the financing company. The lender will take into consideration the aging period of your company's account receivables and depending on it, they would scan all your bill receivables and then create an advance table based on the eligible invoices/bills. Invoices that you have failed to collect even after the deadline will not be considered as this can increase the possibilities of non-payment of the AR loan. On the basis of the total amount of invoices, the lender would sanction your loan amount which can usually be drawn against any time during the month.
  • Factoring Accounts Receivable
The second method of AR financing involves selling off your account receivables/invoices to the lender instead of offering them as a security against an AR loan. The advantage of this method lies in the fact that the lender or the factoring company would be responsible in many cases for recovering the amount from the debtors and handling customers that default. In the initial phase, the firm who has given you the loan will provide 70 to 80 percent of the account receivable amount to your business in advance whereas the remaining balance due on the invoices would be paid only after all your ARs have been received in full payment. You might have to pay a little more than the bank, but the qualification requirements are much less and the advances are much easier to get.

An AR financing option can be explored by businesses of all levels; whether you are mid-size company or a well-established name in the market, you just have to locate an experienced commercial lender or factoring company that has been well established and can provide your business the flexibility it needs. The details of your AR financing can be all worked out once you have found the right company.
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