How to Apply for Accounts Receivable Financing : Everything You Need to Know

February 11, 2025

14 min read

Short-term funding that a business or trade can draw on using its receivables is termed as accounts receivable financing. Basically, it is a type of financing process in which a firm receives monetary aid related to a portion of its accounts receivables. These can be divided into several ways, often with the basis being either a loan or sale of an asset. Often, small-scale businesses supply merchandise to customers on a credit and a large number of this can hamper cash flow in terms of paying salaries, purchasing new inventory, machinery, etc. as applicable. To not hinder the running of the business, accounts receivable financing acts as a great financial aid.

What is Accounts Receivable Financing?

When businesses face cash flow challenges, they can opt for accounts receivable financing, which allows them to unlock capital tied up in unpaid invoices. Accounts receivable is also known as trade receivables, and this financing method enables businesses to use their outstanding invoices as collateral to secure immediate working capital.

A closely related concept is accounts receivable factoring (AR factoring), where a business sells its invoices to a third party at a discount. However, in accounts receivables financing, the company retains ownership of its receivables and is responsible for collecting payments from customers. Indian lenders primarily provide financing by using receivables as collateral rather than purchasing them outright.

One of the biggest advantages of this financing method is that it does not negatively impact credit ratings. However, businesses can typically access only 80-90% of the invoice value, which may influence net income and the balance sheet.

Types of Accounts Receivable Financing

Accounts receivable financing is a great alternative to generate liquidity during a cash crunch as opposed to getting a business loan. Despite the fact that Accounts receivable financing can be structured into various forms, its main types include:

1. Factoring

The most common form of Accounts receivable financing in small businesses, factoring involves the borrower selling his or her receivables to a factoring establishment where they are sold at a discounted price. This discount is totally dependant on the quality of receivables. This relieves the borrower of all responsibilities related to the collection process since outright sales is implemented. Factoring could be expensive as it has numerous additional fees involved. Moreover, to establish and maintain a hassle-free relationship with debtors, factoring should be used sparingly.

2. Asset Backed Securities

This type of security is a type of financing that is offered to large organizations. Asset-backed securities (ABS) is a fixed income channel that pays coupon-based payments to its investors by taking cash from a cluster of underlying owned assets. One of the most commonly used Assets Backed Securities is mortgage-backed securities in which mortgages are the main asset used. While a large firm can affirm the security of their receivables by holding collectible payments and receivables which pass through the investors, borrowing companies can get money via the same channel. The credit rating is directly dependent on the quality of the receivables in this type of AR financing.

3. Accounts Receivable Loans

Accounts receivable loans are typically a source of short-term funding in which the borrowing party can use their accounts receivables as collateral to be able to avail bank loans. The bank loan, if sanctioned, would then pay approximately 80% of the current value of the receivables in question. In this case, the borrower will still be responsible for the assets as he or she will still be the owner of the same. The amount the bank will actually release will be dependent on the quality of the assets offered as collateral.

4. Purchase Order Financing

This form of financing option is ideal for businesses that receive large orders but lack the funds to fulfil them. Here, the lender provides the necessary funds to pay suppliers. In return, the lender places a lien on the purchase order and related receivables. Once the customer makes the final payment, the lender deducts their fees and releases the remaining amount to the business.

How Do Receivables Financing Work?

Businesses use this form of financing to convert outstanding invoices into immediate cash. Here’s how the process unfolds:

Invoice Submission: The business submits unpaid invoices to a financing provider.

Evaluation: The lender assesses the creditworthiness of the customers responsible for the invoices.

Funding Offer: Based on the assessment, the lender advances 80-90% of the invoice value.

Cash Flow Injection: The business receives the advance, boosting liquidity.

Fee Structure: The lender charges a fee based on factors such as invoice volume and customer reliability.

Repayment: Once the customer settles the invoice, the business repays the lender, completing the cycle.

Eligibility Criteria for Accounts Receivable Financing

The eligibility criteria can differ from lender to lender but the following mentioned criteria can be considered general information and common to almost all types;

Specifications	Eligibility Criteria
Age of applicant	Minimum age is 25 years and Maximum age is 55 years
Experience of applicant	Minimum 3 years of running the business
Financial information	Updated and latest income tax returns for the last 3 years

Features and Benefits of Accounts Receivable Financing

The points mentioned below cover all the features and benefits of engaging in accounts receivable financing and should give you an overall idea of how it works;

In case of a loan, lenders could lend up to Rs. 30 – 45 lakhs depending on the accounts receivable
Services can be availed online as many lenders have set up their presence there and offer lucrative services on the websites
Since only accounts receivable is counted, no securities such as properties, assets or any collateral is required
Many lenders permit the withdrawing of the money of only the required amount and also offer repayment facilities of the same, offering flexibility
To protect your credit, you can outright sell accounts receivable to the lenders and take your receivables eliminating defaults
Your EMI’s can be lowered to as much as 45%
Pre-approved offers can be availed of without the hassles of long queues, paperwork and an additional list of formalities

How to Apply Online

It is now easy to apply for accounts receivable financing via SMS facilities as well as online procedures.

1. SMS Facility – Message the number stated on the website of the desired vendor and a representative will revert to you shortly, after which you can state your requirements and go ahead with the application process.

2. Online Procedure – You can click on the ‘click here to apply’ tab on the official lender website and fill in all the mandatory details required after that. A customer care executive will then call you back with the offer and any further discussions can be done thereon.

Essential Documents Required for Accounts Receivable Financing

Even though the documentation might differ from lender to lender, the following mentioned generic documents will be required to avail accounts receivable financing.

A copy of the accounts receivable or invoice
Proof of order delivered
Identification papers
Business ownership proof
Proof of address
Financial certificates
Proof of age
Proof of residency status
Collateral ownership papers in case of loan

Now that you have a clearer idea of how accounts receivable financing works, it is important to notice how it is structured. Over time, it has become an extremely common mode of funding and new and improved technologies are constantly in lieu of upping its game. In comparison to the rigid bank and business loans, this type of financing facility is definitely an easier mode of capital financing. For small business owners, this is definitely a more achievable way of furthering business growth as the criteria are quite lenient in comparison to bank loans. Meanwhile, it is not that it doesn’t suffice for large businesses as it quite simply integrates technology solutions. Before you delve deep into the process, ensure that you know what type of business you are running and how accounts receivable financing will help you get your cash flow with the least amount of hassles and discrepancies.

What is the difference between a commercial loan and accounts receivable financing?

Accounts receivable financing has fewer limitations than commercial loans, some of which are;

There is no upper limit on the amount of financing one can pursue as opposed to commercial loans
Your balance sheet won’t reflect any debt if accounts receivable financing is engaged in
You will not be expected to sell any equity of your business with the benefits of factoring
You will save time and energy with factoring as you will not need to follow up with customers in regards to collecting money
Your business’s net worth will not be a factor when it comes to account receivable financing and only the credit sales will be considered

What is the Difference Between Accounts Receivable Financing and Accounts Receivable Factoring?

While both financing models help businesses leverage their unpaid invoices, they differ in key ways:

Accounts Receivable Factoring: The business sells its invoices to a factoring company, which then takes full responsibility for collecting payments from customers.

Accounts Receivable Financing: The business retains control over collections and uses invoices as collateral for a loan.

The main difference lies in who manages collections- factoring companies handle customer payments in factoring, while businesses retain control in receivable financing.

Why Should You Consider Accounts Receivable Financing?

Small businesses often struggle with delayed payments, making it hard to manage day-to-day expenses. Unlike traditional bank loans which require collateral and long-term commitments, this financing method provides quicker and more accessible loan solutions. Moreover, businesses with poor credit can still qualify for this financing. This is because lenders evaluate the creditworthiness of the customers who owe payments, not just the business itself.

It is ideal for businesses that:

Experience short-term cash flow- gaps (30 to 90 days).
Need funds for seasonal demand or new opportunities.
Are in growth phases and require immediate working capital.
Need cash to cover payroll and operational expenses.

However, if the risk of non-payment is too high, financing may be declined. To improve approval chances, businesses should regularly assess customer credit reports, especially for high-value transactions.

Factors Affecting the Quality of Receivables

Several factors influence the reliability of receivables and determine how much funding a business can secure:

Industry Risks: Some industries have a higher default risk due to economic fluctuations.

Payment Terms: Longer credit periods increase the chances of delayed payments.

Creditworthiness of Customers: Customers with strong financial health ensure timely payments.

Competition: Intense competition may lead to lenient payment terms, increasing risks.

Internal Controls: Efficient financial management reduces errors and enhances collections.

Economic Conditions: A weak economy can lead to higher defaults and delayed payments.

Maintaining high-quality receivables improves funding opportunities and ensures smoother cash flow.

Conclusion

Applying for accounts receivable financing can be a game-changer for businesses looking to unlock cash flow without taking on traditional debt. By leveraging unpaid invoices, companies can secure quick funding to manage operations and growth effectively. Platforms like Lendingkart simplify the process, offering easy access to working capital tailored to your business needs.

Accounts Receivable Financing FAQs:

1. Do I have to apply for accounts receivable financing online?

There are two options of applying for account receivable financing offline. You can send an SMS and talk to a customer care executive or call up on the helpline of the preferred lender and go ahead with the process. Otherwise, the online application is pretty simple and quick.

2. Can contractors also be considered for accounts receivable financing?

The good part about factoring is that you will be eligible to receive AR financing no matter what profession you are in if you have good credit ratings and are working with or have worked with a reputed brand/owner.

3. In case of poor credit, can I still apply for accounts receivable financing?

Usually, it is a good practice to keep a steady credit rating. However, if you have a strong customer list, you will be considered for accounts receivable financing.

4. Where can I apply for accounts receivable financing?

There are several reputed and certified companies and individuals that will assist you in accounts receivable financing. You can do a thorough research and check online reviews to make an informed decision as to which one to pick.

5. What are the types of businesses that would most ideally be suited to apply for accounts receivable financing?

Despite being a common practice in businesses of all sizes and over a variety of different industries, AR financing is often favoured by transportation, manufacturing, trucking, distribution and wholesale sectors.

6. What is invoice factoring?

It is both, a business as well as a funding solution. However, the main reason why entities choose this is because of the quick cash it offers.

7. What type of identification papers would be considered as a valid document?

Identification papers such as Aadhar card, PAN card, Drivers license and passport would be considered official ID proofs.

8. Is there a specific financing rate with accounts receivable financing?

Depending on the industry as well as its volume, the financing rate percentage ranges from 75% to 95%.

9. How does one classify accounts receivable financing?

On the balance sheet of the company, the accounts receivable financing is the money that is owed to a company by the clients who have utilized services on credit. Basically, it refers to the payment amounts that have not yet been realized and are classified as current assets.

10. Are there any specific industries that benefit the most from accounts receivable financing?

Accounts receivable financing benefits various industries, especially those relying on regular invoices. Businesses involved in manufacturing, wholesale, or service sectors often utilize this type of financing. It offers flexibility and liquidity by converting outstanding invoices into immediate capital. Whether it’s a loan against receivables or other types of receivable financing, industries with consistent invoicing find significant value in leveraging their accounts receivable for accessible funds.

11. What is the average processing time for accounts receivable financing applications?

The average processing time for accounts receivable financing applications varies based on the type of receivable financing chosen. Generally, receivable financing options like invoice factoring or loans against receivables offer differing timelines. Invoice factoring typically takes 1-2 weeks, while loans against receivables may take slightly longer, around 2-4 weeks, subject to individual circumstances and documentation completion.

12. Can accounts receivable financing be used to cover unpaid invoices from international clients?

Accounts receivable financing, encompassing various types of receivable financing such as loans against receivables, can indeed cover unpaid invoices from international clients. This method allows businesses to leverage their outstanding invoices as collateral for funding. However, eligibility and terms may vary based on the provider and location. It’s advisable to explore options tailored for international transactions wherever possible.

13. How are fees and interest rates determined in accounts receivable financing?

Fees and interest rates in accounts receivable financing vary based on the type of receivable financing chosen. For instance, in receivable financing, rates are often determined by the creditworthiness of the debtor, while loans against receivables may hinge on factors like invoice aging and volume. These rates and fees fluctuate across lenders and are influenced by risk assessment and market conditions.

14. Is there a minimum or maximum amount of accounts receivable that can be financed?

Receivable financing, including loans against receivables, typically doesn’t mandate specific minimum or maximum thresholds for accounts receivable. Various types of receivable financing adapt to different business sizes and needs, allowing flexibility in leveraging outstanding invoices as collateral. Lenders often assess factors like creditworthiness, invoice quality, and the volume of receivables, tailoring solutions to individual circumstances rather than imposing rigid limits.