Accounts Receivable Financing

Accounts Receivable Financing Definition Accounts receivable (AR) financing is a way for a company to access cash by using outstanding customer invoices as the basis for financing. The arrangement can be structured either as an asset sale (factoring) or as a loan secured by receivables. AR are current assets on the balance sheet and are often considered when measuring liquidity (e.g., quick ratio). Explore More Resources

How it works
* A company that has billed customers but has not yet been paid converts some or all of those receivables into immediate cash.
* Financiers evaluate the quality and age of invoices and then advance a percentage of the invoice value.
* Depending on the structure, the financier may take responsibility for collections or the company may retain collections responsibility and simply repay an advance.
Common structures Factoring (asset sale)
* The company sells invoices to a factoring firm.
* The factor typically advances a portion of the invoice value (often up to ~70–90%) and holds the remainder as a reserve.
* When the invoice is paid by the customer, the factor returns the reserve minus fees.
* The factor usually assumes collection responsibility and the risk of customer default (unless recourse factoring is used, where the seller retains some default risk).
* Factors earn money through the spread (advance vs. final payout) and explicit fees.
AR-backed loan or line of credit
* The company borrows against the value of its receivables; receivables remain on the company’s balance sheet.
* Advances can approach 100% of an individual receivable in some arrangements, but the company must repay principal plus interest and fees.
* Loans may be secured by invoices and can be structured as short-term advances or revolving lines tied to receivables.
Underwriting considerations Factors and lenders typically assess:
- Creditworthiness of the invoiced customers (receivables owed by larger, creditworthy customers are more valuable)
- Age of receivables (newer invoices get better terms)
- Concentration risk (reliance on a small number of large customers)
- Industry and historical collection rates
- Integration with accounting systems (many providers link to QuickBooks, Xero, FreshBooks for faster underwriting and advances) Advantages
* Fast access to cash without the time and documentation of a traditional loan process.
* Improves working capital and cash flow predictability.
* With factoring (asset sale), the seller may offload collections and some default risk.
* AR loans can provide advances without selling the asset and may allow full-value advances in some cases.
Disadvantages
* Can be more expensive than traditional bank financing; fees and interest may be high.
* Factoring reduces the overall value received for invoices due to spread and fees.
* Potential reputational or customer relationship impacts if the financier handles collections.
* Terms vary widely and may be less favorable for older, smaller, or higher-risk receivables.
Choosing between factoring and an AR loan
* Use factoring if you want to outsource collections and transfer some default risk.
* Use an AR-backed loan or line if you prefer to retain customer relationships and ownership of receivables.
* Compare effective cost (fees + interest), advance rates, flexibility, and operational impact (integration, reporting, collections).
Examples of provider approaches
* Some fintech providers integrate directly with accounting software to automate invoice verification and speed advances.
* Examples of marketplace participants include traditional factors and newer fintech lenders that offer invoice advances or revolving lines of credit based on AR.
Key takeaways
* AR financing converts unpaid invoices into immediate cash through factoring (asset sale) or AR-backed loans.
* Terms depend heavily on the quality and age of receivables and the invoiced customers’ creditworthiness.
* It’s a useful option for improving short-term liquidity but can be pricier than other financing methods; weigh costs, operational impacts, and whether you want to retain collections responsibility.