Unlock Your Business's Cash Flow: A Guide to Accounts Receivable Loans

If you’ve been in a position where you find yourself struggling with cash flow issues because customers haven't paid their outstanding invoices yet, you’re not alone. This is a common problem for businesses of all sizes, and it can be especially challenging for small businesses with limited financial resources.

Luckily, there is a solution: accounts receivable loans. In this comprehensive guide, we'll break down everything you need to know about how accounts receivable loans work, and how this type of financing can help your business unlock the cash it needs to thrive.

What is an Accounts Receivable Loan?

Accounts receivable, or AR financing, is a type of financing where a lender provides capital to the borrower based on the value of their outstanding accounts receivable.

Accounts receivable (AR) is basically an asset with a value equal to the outstanding balances of invoices billed to customers, that have not yet been paid. When structured as a loan agreement, the borrowing business gets an advance based on these balances, which has to be repaid later. Some companies rely on AR financing to establish stable, predictable cash flow.

Advantages of AR Financing

First, let’s take a look at three advantages of accounts receivable loans:

Quick access to cash: AR financing can unlock a business’s cash flow, providing brands access to much needed liquidity. This is especially helpful for businesses that have long payment cycles or are prone to seasonal fluctuations. Through this type of loan, brands can get quick access to funds to invest in growth opportunities or pay for expenses - without having to wait for customers to pay their outstanding invoices.

Lower risk: Borrowing against money that’s already promised means lower risk. Since the loan is secured by the value of the borrower's outstanding invoices, the lender has a lower risk of default. This can translate into lower interest rates and fees for the borrower.

Retaining business ownership: Unlike other financing options that require businesses to give up a percentage of ownership in exchange for the money, AR financing does not require founders to give up equity.

Disadvantages of AR Financing

Repayment cost: Since the business is borrowing money based on their outstanding balance, the money needs to be repaid at a later time, including interest or fees. AR financing can also be more expensive than a traditional bank loan, as many lenders charge higher fees and interest rates.

Restrictions on the funds: Depending on the lender, some borrowers may face restrictions when it comes to what the funds can be used for. This is to ensure that the funds are being used for their intended purpose. This should be taken into consideration when applying for accounts receivable financing, and is usually outlined in the loan agreement.

Possible loss of control: The accounts receivable are assigned to a lender  as collateral for the loan, which means the lender can temporarily take control of payment collection in some cases. This can strain the relationship between the business and their clients.

How the Process Works

To underwrite an accounts receivable loan, lenders will want to see financial records, such as an accounts receivable aging report. Lastly, lenders will also assess the company’s overall financial health, and may want to see a business plan and creditworthiness.

1. Application: A business submits an application to the lender of choice including information about the business, financials and its accounts receivable.

2. Due Diligence: The lender then goes ahead and conducts due diligence on the brand’s AR, verifying the information submitted, which often includes financial statements, invoices, credit history, and more.

3. Receive Funds: Once the application is approved, the lender advances a percentage of the value of the borrower’s invoices, usually a range between 70% and 90%. The brand now has access to the working capital.

4. Collecting Payment: The brand then goes about collecting payment from its customers on the outstanding invoices that were used in the funding process.

5. Lender Repayment: Once payment is received, it is usually deposited into an account or lockbox that the lender has access to and control over. The brand repays the loan amount plus any interest or fees, and the process is complete.

The AR loan process is designed to provide businesses with immediate access to working capital by leveraging the value of their outstanding invoices.

What are the alternatives to accounts receivable financing?

There are many options available for emerging brands that are looking to boost their cash flow.

Inventory financing, for example, is a funding solution that emerging and growing brands can utilize to gain access to much-needed capital. The concept is simple: It’s a type of financing that uses the inventory you already have on hand as collateral.

You can also learn more about the differences between equity and debt financing here, to determine which is best suited for your business.

Assembled Brands' mission is to help D2C businesses build their brand equity fueled by capital that scales with growth. Find out more about how your business can benefit from working capital, business development and industry insights by filling out our fast and easy application.