For businesses that need a quick influx of working capital, alternative financing providers offer a variety of effective solutions. Two options are receiving a lot of interest from businesses that rely on receivables to sustain their cash flow – accounts receivable financing and invoice factoring. However, many business owners don’t understand the difference between the two and often consider them to be the same. Understanding how each option works and how they differ will make it easier to decide which one would work best for your company.
Accounts receivable financing is a short-term, asset-based loan that can be used to improve your company’s cash flow. Here’s how it works.
Accounts receivable financing is similar to a traditional bank loan. However, there are some significant differences. To secure a bank loan, you must provide collateral. Acceptable collateral includes business real estate, equipment, and may even extend to the business owner’s personal assets. With accounts receivable financing, the collateral is business assets associated with the receivables being financed.
The amount of funding provided by this type of financing is typically 70 to 90 percent of the face value of the qualifying receivables. These are defined as invoices that are less than 90 days old and owed to you by customers the financing provider deems creditworthy. There is also a collateral management fee, which is normally 1 to 2 percent of outstanding receivables. Interest is assessed on the amount of financing received. On average, it varies from 3 to 5 percent, depending on the provider.
Invoice factoring is similar to accounts receivable financing in that it can also provide a business with 70 to 90 percent of the face value of the invoice being factored. However, a factoring provider will purchase your invoices and your customers will then owe them. Once an invoice has been satisfied, the factoring provider will then send you the remaining balance minus a factoring fee. Factoring fees also vary from provider to provider but typically range from 1.5 to 5.5 percent of the amount advanced to you.
Because the invoices are purchased outright, there is no collateral required. The factoring provider will essentially become your collection manager for the invoices you factor. It is important to keep in mind there are two types of factoring – recourse and non-recourse.
Recourse factoring is the most common and requires you to repay the purchase amount of the invoice if your customer defaults. With non-recourse factoring, the provider assumes most of the risk, but the factoring fees are higher. Non-recourse factoring doesn’t release you from all liability if your customer doesn’t pay the factor. There are only very specific situations in which you are not responsible for customer non-payment, such as if the customer has declared bankruptcy.
The answer to that question depends on your business and the specific circumstance surrounding your lack of working capital. It can help to understand the advantages of each type of financing.
Accounts receivable financing can sometimes be the less expensive option. However, it is less flexible than invoice factoring, requiring that all of your accounts receivable be put up as collateral. In that respect, accounts receivable financing presents a higher level of risk.
With invoice factoring, you can pick and choose which invoices to sell. This allows you to minimize the risk by only selling the invoices owed to you by creditworthy customers.
At CapFlow Funding Group we specialize in invoice factoring and can help you determine if it is the right option for your business. We are dedicated to helping our clients find the best funding solution and can also connect our clients to options such as purchase order financing, inventory funding, and merchant cash advances. We service many different industries with a variety of funding needs. Contact us today or apply online. Get the cash you need to keep your business moving forward.
Traditional business loans are becoming increasingly difficult to obtain. This has caused more business owners to consider alternative financing options to get funding for business growth. With multiple funding options to choose from, how do you know which would be best for your business? Two popular options for business funding are the ACH loan and the merchant cash advance. However, just because they are a popular choice, that doesn’t necessarily mean either is the right choice for your business. To make a wise decision when choosing between these or any other alternative funding options, it’s important to understand how they differ. Let’s take a more in-depth look at each of these options to make the choice easier.
Although it is called a loan, an ACH loan is actually an advance on future revenue. ACH (Automated Clearing House) refers to the method of repayment. With an ACH loan, the business receiving funding will repay the lender via direct withdrawals from their business bank account.
These withdrawals are a set amount taken at specific intervals and will be monthly, weekly, or daily depending on the terms offered by the lender. Regardless of any fluctuations in your incoming revenue during the repayment period, your payments will remain the same. If your revenues should decrease during the repayment period, you could face a serious disruption in your cash flow.
ACH loans are designed for most types of business and can be a good option for short-term funding. When evaluating your application for ACH funding, lenders will be more interested in the average daily balance of your business checking account rather than your credit score. Loan amounts are generally smaller than some other funding options and the APR can be significantly higher. There are often origination fees, prepayment penalties, and other costs.
There are many similarities between the ACH loans and a merchant cash advance, which can lead to confusion. The merchant cash advance is also not considered a loan and payments are made automatically. It is an advance on future credit and debit card revenues and is designed specifically for merchants who receive most of their revenue via debit and credit card sales.
Repayment is based on and deducted from these sales. This is where the major difference between the merchant cash advance and an ACH loan is revealed. While ACH payments are static, merchant cash advance payments fluctuate with the rise and fall of debit and credit card sales. This built-in flexibility can help to prevent any cash flow disruptions during the repayment period that could impact daily operations. The repayment schedule can be monthly, weekly, or daily depending on the terms offered by the merchant cash advance provider. The APR for the merchant cash advance will be higher than that of traditional loans. There is no opportunity to pay down the principle in order to decrease the interest due. The full interest amount must be paid along with the entire advance amount before the merchant cash advance is satisfied.
As you can see, like most funding options, there are pros and cons to both ACH loans and merchant cash advances. However, with the low approval rate of traditional business loans and the long line of business hoping to receive SBA loan approval, alternative funding options can be a great source of timely short-term funding to address your current business needs.
CapFlow Funding Group works with a variety of different industries to provide the funding they need to keep their businesses moving forward. Although we specialize in invoice factoring, we work with trusted partners to provide merchant cash advances as well as other options. We can also help you understand the differences between the options available. Our goal is to provide you with the best possible funding solution for your business. Contact us today to see how we can help you get the funding you need.