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Posted 02/09/2022 in Business Loans

What You Need to Know About A/R Line of Credit

What You Need to Know About A/R Line of Credit

As we venture out of the gloom that the global pandemic brought, business owners are dealing with a new challenge: cash flow issues. One of the common reasons for this is that your customers may be late with invoice payments. If a chunk of your finances is tied to accounts receivables, your business is going to take a hit. 

You need funding to carry out daily operations, asset purchase and maintenance, employee payroll, inventory financing, and many more. When you don’t have enough of these finances available, you may think about applying for a loan from a traditional banking institution. 

However, banks these days are a bit are picky about who gets to receive loans. Thus, you may experience a little difficulty in getting your loan request approved.

A/R line of credit might just be what you need to keep your business afloat. This article will cover everything you need to know about the A/R line of credit and how to apply for one. 

What Is A/R Line of Credit?

A/R simply stands for accounts receivables, and its line of credit is finances provided to borrowers against outstanding invoices. This form of credit differs from the rest because you still maintain ownership of the unpaid invoices. 

A/R lines of credit are usually short-term loans granted to business owners to run their business pending when they’d receive their outstanding cash owed to them by clients. While most financial experts view this as asset-based lending, collateral such as equipment or inventory is not used to secure the loan. 

Some Important Terms to Note About A/R Line of Credit

As you apply for an A/R line of credit, you may encounter the following terms. You must know what they mean. 

  • Face value. This is referred to as the cash amount of unpaid invoices. Say, for instance, the invoice you bill your customers owing you is $15,000, then the face value of the invoice is $15,000. It’s that simple. 
  • Advance rate. The advance rate is the face value rate that directly factors your spending limit when your line of credit is approved by a lender. What determines your advance rate is the credit rating of your customers. Thus, if their credit rating is high, you have a higher advance rate. 
  • A/R Aging Report. This report is a comprehensive list of unpaid invoices owed by your customers. It is a list that connotes how long a due invoice from a certain customer has been outstanding. This could range anywhere from days, weeks, or months. 
  • Factoring. Often, people mistake using the A/R line of credit and Factoring interchangeably. In factoring, A company buys all your unpaid invoices while it acts as collateral until the borrowed loan is paid. The distinct difference is that the factoring company will do further communications with your customers. If your customers do not pay their owed invoices, the factoring company bears the loss. Most businesses would not go into factoring as it only proves that they face downtime and are desperate. 

How does A/R Line of Credit Work?

When you apply for an A/R line of credit and get approved, you will have access to credit you can spend for your business needs. All you need to do is request, and the lender will transfer the necessary funds to you within hours or days. 

In this form of credit, the lender will determine the rate at which the credit will be charged. Typically, the lender will charge you based on the face value of outstanding invoices. More often than not, you will be assigned weekly. 

Thus, the longer it takes your customers to pay up their invoices, the more charges you’d have to pay back to the lender. It is also essential to find out the lenders' annual percentage rate (APR). On the surface, some of these charges might be less when they’re weekly. But if you run that into APR, you may not like the rate. So, it is vital to review every agreement made with a lender to decide precisely what you want. 

A/R lines of credit are short-termed; this means the repayment must be made within one year. However, different lenders have different requirements. 

After receiving the credit from the lender, you’d need to contact your customers to collect the unpaid invoices. In some other cases, your customers will pay the lender directly. When you take the money from your clients, you can pay back your lender, including their interest rate. However, if your lender collects money from your customers, they will remove their fees plus charges and give you what remains. 

Which Businesses Can Apply for A//R Line of Credit?

Some of the businesses that can apply for an A/R line of credit includes: 

  • Companies on contracts with the local, state, or federal governments. 
  • Companies with clients that work for governmental agencies
  • Businesses that provide services and products to other businesses 

These businesses are best suited to apply for this line of credit because even though their clients are late-payers but are reliable. Lenders will not bat an eyelid when granting the credit. Thus, you can apply for the credit if your business is in the manufacturing, construction, medical, and HR industry. 

What Do You Need to Apply for an A/R Line of Credit?

You will need the following documents to apply for this credit:

  • Bank statement
  • A/R aging report
  • Valid driver’s license
  • EIN

Your business or personal credit score is not needed to apply for the credit. What lenders particularly look out for is the credit rating of your customers. Some lenders may seek a minimum annual revenue between $50,000 to $500,000.

Final Thoughts

A/R line of credit is suited for you if you’ve got impending invoices yet to be paid. You can use this line of credit for inventory purchasing, employee payroll, equipment purchase, and other business needs. 

Here at Bunny Lender, we connect you with the best lenders in your city. These lenders will only carry out a soft check on your business credit which will not appear on your credit report or affect your score.

Input your location and check them out. 

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