Cash flow is the lifeblood of any business and, to ensure liquidity, businesses often need to borrow over the short time. However, a lack of collateral can often make that difficult, especially for newer companies.
Accounts receivable financing uses unpaid invoices as collateral, making it a form of credit exceptionally well suited to solving the issues caused by late payment of invoices.
This article will explain exactly what AR financing is, the different types of AR financing available and its benefits and drawbacks.
So, what is AR financing? In finance, AR stands for "accounts receivable." Accounts receivable are the money that a company is owed by its customers for goods or services that have been delivered but not yet paid for.
Accounts receivable (AR) financing is a type of financing that allows businesses to borrow money from receivable financing companies using their outstanding invoices as collateral. They are short-term accounts receivable loans that are typically repaid when the invoices are collected.
Generally, accounts receivable financing is based on the value of the outstanding invoices, with the lender advancing an amount of the outstanding invoice and charging interest until the repayment is made. You might be wondering whether accounts receivable are debit or credit—it's considered a debit because it represents an amount the company expects to receive.
Loans on accounts receivable can be a helpful financing option for businesses to access working capital and improve cash flow.
While the exact process for applying for, and receiving, accounts receivables loans, depends on the loan provider, below is overview of standard process:
For companies dealing with the current late payment crisis, accounts receivables loans can have a wide range of benefits, including:
AR funding can provide businesses with immediate access to cash, which can be used to meet various financial obligations, such as paying suppliers, employees, or operational expenses.
AR funding not only improves cash flow but also supports better accounts receivable management. By ensuring quicker collections and reducing reliance on credit, businesses can maintain healthier financial operations.
In a well-structured arrangement, selective receivables financing remains separate from a company's financial statements, ensuring that it does not affect outstanding loans or future needs for credit lines and related funding sources.
Businesses that have difficulty obtaining traditional loans due to a lack of collateral, have poor credit scores, or a short operating history may find AR funding to be a viable alternative.
The application process for AR funding is typically less complex and time-consuming compared to traditional loans, making it a convenient option for businesses seeking quick access to capital.
AR funding typically offers flexible repayment terms, allowing businesses to align their repayment schedule with their cash flow cycles.
By improving cash flow and reducing the risk of late payments, AR funding can enable businesses to invest in growth opportunities, such as expanding their product lines or entering new markets.
There are a range of accounts receivable funding options on the market. Three of the most common options include:
Invoice factoring - Invoice factoring is a type of AR financing in which a business sells its accounts receivable to a third-party factoring company at a discount. The factoring company then assumes the responsibility of collecting payment from the customers.
Asset-based lending (ABL) - Asset-based lending is a type of financing that uses a company's assets, including its accounts receivable, as collateral for a loan. Asset-based lenders typically offer larger loan amounts and longer repayment terms than other types of AR financing.
Supply chain finance - Supply chain finance is a type of AR financing that involves a collaboration between a business, its suppliers, and a financial institution. The financial institution provides financing to the suppliers, and the business agrees to pay the suppliers early in exchange for a discount.
As with all forms of financing, there are drawbacks associated with loans on accounts receivable which need to be taken into account. These include:
To give you an idea of what the process for using accounts receivable lending looks like, below is an example of how a fictional company might make use of accounts receivable financing to overcome cash flow issues caused by outstanding invoices:
XYZ Company is a small business that sells widgets to other businesses. The company has $100,000 in outstanding invoices that are due within the next 30 days. XYZ Company needs to make a large purchase of raw materials in order to fulfill a new order, but it does not have the cash on hand to do so.
XYZ Company applies for accounts receivable financing from a lender. The lender reviews XYZ Company's financial statements and invoices and approves a loan of $80,000. The lender advances the $80,000 to XYZ Company, which uses the funds to purchase the raw materials.
XYZ Company's customers pay their invoices to the lender, which then deducts the $80,000 loan amount and any interest and fees from the payments. The remaining balance is remitted to XYZ Company.
XYZ Company uses the funds from the accounts receivable financing to pay its suppliers and other expenses. The company is able to fulfill the new order and generate additional revenue.
The cost of accounts receivable financing varies depending on a number of factors, such as the lender, the size of the loan, the creditworthiness of the customers, and the repayment terms. However, as a general rule of thumb, businesses can expect to pay an interest rate of between 1% and 5% per month on their outstanding balance.
In addition to interest, lenders may also charge origination fees, which are typically a percentage of the loan amount. These fees can range from 1% to 5%.
Other potential costs associated with accounts receivable financing include:
It is important to factor all of these costs into your decision when considering accounts receivable financing.
To help you fully understand how accounts receivable financing works, the credit control experts at Chaser have collated and answered the most common questions on accounts receivable loans:
A financing receivable is a loan that is secured by a company's accounts receivable. This type of financing allows businesses to borrow money using their outstanding invoices as collateral. The lender typically advances a percentage of the value of the invoices, and the business repays the loan as its customers pay their invoices.
Yes. Specific lenders offer accounts receivable financing, which makes use of outstanding invoices as collateral against advanced funds.
An accounts receivable financing agreement is a contract between your business and an AR funding lender that sets out the obligations of both parties, the amount advanced, the invoices used as collateral, the interest rates, repayment schedules, and other critical details.
Accounts receivable financing and factoring are both types of financing that allow businesses to borrow money against their outstanding invoices. However, there are key differences between the two options.
Accounts Receivable Financing
Factoring
The best option for a business depends on their specific needs, such as immediate access to cash and risk tolerance.
Selective receivables finance is a type of accounts receivable financing that allows businesses to borrow money against a portion of their outstanding invoices. This type of financing is typically used by businesses that have a large volume of invoices but only need to borrow money against a small portion of them.
Accounts receivable software is a tool that helps businesses manage and automate the process of tracking and collecting payments owed by customers. It streamlines the invoicing process, monitors overdue payments, and provides reports on outstanding balances. To see the top AR solutions check our comprehensive list of best accounts receivable software in 2025.