What is accounts receivable financing?
What is accounts receivable financing and when does it make sense?
Short answer
**Accounts receivable (AR) financing** is a way to convert unpaid invoices into immediate cash by using them as collateral for a loan or by selling them outright to a financing company.
**Two main types:**
**1. Invoice factoring (selling receivables)** You sell your outstanding invoices to a factoring company at a discount — typically 70–90% of face value paid immediately, with the remainder (minus the factoring fee) paid when your customer pays. The factoring company collects from your customer directly.
**2. AR-based line of credit (borrowing against receivables)** A lender advances a percentage of your outstanding AR (typically 70–85%) as a revolving credit line. You repay as customers pay you. You keep ownership of the invoices and collect from customers yourself.
**Cost comparison:** - Factoring: 1–5% of invoice value per month (effective APR: 15–60%+) - AR line of credit: Prime + 2–6% APR, plus origination fees
**When AR financing makes sense:** - You have long payment terms (Net 60–90) but need cash now to pay suppliers or staff - You're in a growth phase and can't wait 60 days for customers to pay - Your customers are creditworthy businesses (factoring approval is based on their credit, not yours) - The cost of financing is less than the cost of losing a contract or missing payroll
**When it doesn't make sense:** - Your invoices are under 30 days past due — normal collection is cheaper - You're already pursuing collections on most of your AR — factors won't buy old or disputed invoices - The financing fee exceeds the margin on the underlying work
**Important:** AR financing is a cash-flow management tool, not a collection tool. You still need a plan for invoices that customers don't pay — factoring companies often have recourse clauses that require you to buy back unpaid invoices.