AR Financing for Startups and Entrepreneurs – a Guide

Author Team Coral Capital

At one point or another, many business owners find themselves in need of immediate capital.

This could be due to slow paying clients, backlogged bills, or even a sudden uptick in business. Either way, the answer to a lack of capital most often is go through traditional avenues of lending, such as a bank loan or line of credit. And while these options are still popular, they aren’t necessarily available for all business owners, especially start-ups and budding entrepreneurs.

The Problem with Traditional forms of Lending

While securing capital from a bank has always been the go-to option, it’s become harder than ever for start-ups and new entrepreneurs. This is due to the fact that a bank loan requires a long and established history of credit, which can be almost impossible for small companies who have little-to- no prior experience or credit history. Beyond that, bank loans often involve a lengthy and complicated process that can be overwhelming for even the most successful start-up or small business. Because of these hurdles involved with traditional loans, many start-ups and entrepreneurs have started seeking alternative forms of funding to bring their companies to the next level.

Alternate Options

Personal Savings

The most straight forward and non-complicated form of alternate funding would be to pull funds from a personal savings account. By doing this, business owners don’t face additional costs such as interest or agency fees, making the transaction clean and simple. While this would be the easiest form of financing, the issue is that very few entrepreneurs and start-ups have access to additional savings,
making this an almost impossible option for financing.

VC Funding

With no bank loans and no personal savings, many start-up companies and entrepreneurs find themselves searching for investors to help fund and push their company to the next level. VC funding is a great way for upcoming companies to secure a large sum of money, especially for those who have few or no customers. But, like other forms of funding, there are a few downfalls when it comes to this form of financing.

The world of VC funding is complicated, and in the current market, VC firms are free to be as picky as they please. According to an article by Forbes, VCs finance only about “one or two ventures out of 100 business plans they see,” meaning that 98% of start-ups and entrepreneurs are denied funding right from the start.

If a business is lucky enough to secure funding, it doesn’t necessarily mean that the problems are over. Many businesses find the steps after funding to be the most difficult, including relinquishing a portion of the company to the VC, and working under the pressure of the impending expectation of ROI.

AR Financing

Accounts receivable financing is an alternative form of commercial finance that can provide fast working capital to business owners. It uses the company’s accounts receivable as a basis for financing, leaving those who use it with a fast and predictable cash flow. This type of factoring helps business owners smooth out cash flow mismatches, enabling them to focus on their core business without being
weighed down by continual short-term funding constraints.

AR financing for startups

How AR Financing Works?

Step 1: Account Set Up

The first step in setting up the account would be for the factoring company to check out the fundamentals of the start-up or small business. This would include going over the company’s receivables aging report, corporate taxes, lien information, as well as the clients’ credit profiles.

Step 2: Pick the Receivables

The next step would be for the company to pick out which accounts they would prefer to fund the AR financing. After this, the customer invoices would be submitted.

Step Three: The Verification Process

After the goods or services are received by the customer, the financing company would then verify them. This process ensures that all invoice amounts are correct and that they’re due within a 30-90 day time period.

Step Four: The Financing of the Receivables

After the verification process is finished, the funds would be calculated by the factoring company and deposited into the company’s bank account—sometimes in as little as 24 hours.

Step Five: Final Step

Once the funds are received and everything is paid off, the transaction would be considered settled.

Pros of AR Financing

  • It’s easy: Unlike traditional bank loans or lines of credit, businesses with little to no credit are great candidates for AR financing. This is due to the fact that while factors do look at a businesses credit score, they are not as critical as banks as they are more interested in the creditworthiness of the client’s customers.
  • It’s quick: As mentioned before, applying for a bank loan or line of credit can be a lengthy and complicated process for start-ups and entrepreneurs. And in the unlikely event that the loan is approved, it can take months to actually receive capital from the bank. Unlike traditional forms of lending, AR financing reigns superior in these particular categories. After being approved by a factoring company – which is a short process in itself due to the small amount of backup documentation needed—the company receives cash within the next few days, or even as soon as the next day in some cases.
  • It’s affordable: The cost of factoring is extremely competitive when compared with other financing options, including most traditional loans—which come with high interest and additional fees.

In any case, it’s imperative for all business owners to do through research to find out which form of financing is right for their business. And while some may still fit into the more traditional forms of lending, many start-ups and entrepreneurs may find the unique setup of factoring to be a better fit.

Overall, outsourcing accounts receivable by employing an invoice factoring company is an effective, cost-efficient method of small business financing for any B2B company. It allows companies to focus on their main business objectives and the bottom line, while getting more out of their accounts receivable.