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Accounts Receivable Financing

Last Updated: 3/28/2022
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Every business owner knows that cash doesn't always flow the way it's supposed to. While you wait for clients to pay their invoices, you still need to pay your suppliers and employees. You know those clients are good for the money, but that doesn't help you cover this week's payroll. Accounts receivable financing can help you keep the money moving by giving you a loan using outstanding invoices as collateral. The lender advances up to 90 percent of the unpaid invoice amount, giving you cash to use for your operating expenses. Read on to learn the ins and out of an accounts receivable loan.

How Does Accounts Receivable Financing Work?

The AR financing company might not want to lend against all of your outstanding invoices - and for good reason. Only those that stand a good chance of being repaid will make good collateral. Here's what will happen:


The financier will evaluate your ledger of invoices, giving preference to steady clients with good credit

Likewise, invoices from major corporations or the government are considered more valuable than invoices from individuals or small companies. Invoices that are from small, less reliable clients or long overdue may be financed at a higher interest rate or not at all.


The financier advances part of those unpaid invoices to you as cash

This amount is usually 85 percent of the unpaid invoices used as collateral, though it can range from 60 to 90 percent. For an invoice of $50,000, the advance amount would be $42,000. You can use that cash immediately to pay suppliers or meet other expenses, without waiting for the client to pay.


Don't forget the weekly interest

In addition to the processing fee, the financier will charge interest each week until the invoice is repaid. A typical rate is 1 percent, though it can go higher. The longer a client takes to settle an invoice, the more interest you will pay. If the client who owes you $50,000 takes four weeks to pay, you'll be charged $2,000 in interest.


The financier charges you a processing fee

This usually ranges from 1 to 4 percent of the value of the invoice, depending on the invoice's quality. A fee of 3 percent is fairly typical. The processing fee on a $50,000 invoice: $1,500.


The financier will hold the remaining percentage in reserve until your client has repaid the invoice.

In the case of the $50,000 above, the amount held in reserve would be 15 percent, or $7,500.


After the client pays, you'll get back your reserves

When the client pays the invoice, the financier returns the reserve amount to you—minus the processing fee ($1,500) and the weekly interest ($2,000). From the original reserve of $7,500, you'll get back $4,000.


You weigh your future options

So how much will AR financing cost you in the end? For that $50,000 invoice, you would pay $3,500 in fees and interest or 7 percent of the value of the invoice. This is much higher than the interest on a bank loan, but also much less than the interest on an unsecured business loan from a private, non-bank lender. Is it worth it? It depends on what other financing you're able to qualify for, the quality of your invoices and how long it takes for your clients to pay.

Advantages and Disadvantages of AR Financing

If you have responsible clients with good credit, AR financing may be a good stop-gap measure to keep things running. And since your invoices serve as collateral, you won't have to put your home or other assets up for collateral. Here's more on the advantages - and risks - of AR financing.


  • It's a quick source of cash - If you need cash urgently, you can get it fast with AR financing. This can help with a variety of situations, like having to make repairs or renovations, paying a big tax bill or keeping your cash flow healthy if customers pay late. Funds are typically available within five to 10 days, sometimes even faster.
  • Your working capital remains free - Sometimes you have to spend money to make money. But what if your capital is tied up in inventory or equipment? AR financing can help you make a strategic investment in your business, like hiring more staff to boost sales. With AR financing, those unpaid invoices won't stand in the way of growing your business.
  • No extra collateral is required - Other types of business loans might require you to use your house or car as collateral. That's not necessary with AR financing since the invoices themselves serve as collateral. This keeps your personal assets safe while your business's cash flow improves.


  • Bad clients = bad financing terms - It could be that maddeningly slow-paying clients made you resort to AR financing in the first place. And the slower they pay, the more they cost you in weekly interest. Not only that, if the financier sees that you have clients with a history of delinquency, it may charge a higher rate of interest for them.
  • It may not be cost-effective: If you have good clients with good credit, AR financing can be a smart financing strategy. But if you're stuck with deadbeat clients who pay late, the interest for AR financing can become exorbitant. Make sure it's your best financing option before you commit.
  • You may lose a lot of time trying to collect from clients - If that is setting you back, you might consider factoring. Instead of using invoices as collateral, you would sell them to a financing company (called a factor). The factor takes responsibility for collecting the unpaid invoice amounts. This is a big plus for some businesses because they no longer have the headache of chasing after payments. Factoring may be more expensive, but for some companies, getting rid of those invoices is worth it.

How to Choose a Reputable AR Financing Company

Not all lenders are created equal. Because alternative lenders don't face the same government regulations as banks, it's important to do some research and make sure you're dealing with one that's reputable. You also want to find a financier that understands your specific business. As with any major decision, take the time to weigh your options before committing.

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    Do targeted online research

    An internet search for "accounts receivable financing" will turn up dozens of options. But how do you choose the right one? Start with websites that can help you build a list of good preliminary options. CFA's Connected Community can link you with AR financing companies that are members of the Commercial Finance Association, as can and

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    Look within your industry

    Many AR financing companies specialize in specific industries. They will have the best understanding of the billing cycles and legal considerations for your business. To find one (or better yet, a few different candidates) to compare, look to your industry association or ask colleagues in your field for referrals.

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    Find the right fit

    You'll likely get the best service from a financing company that has a track record with businesses the same size as yours. Make sure the amount of monthly financing you need—whether it's $50,000 or $500,000—is in scale with the lender's other clients.

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    Remove the bad apples

    Check with the Better Business Bureau or websites like Ripoff Report and Yelp to see if there are major complaints from customers, or talk with the state Attorney General's Office for information about lawsuits.

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    Talk the talk

    Once you've narrowed down your search to three or four good candidates, talk to a representative from each financing company. "Small businesses should be clear about what it's going to cost them," advises Tim Atkinson of the Commercial Finance Association (CFA). "They should work with someone who will be very happy to make it clear what it's going to cost them."

Tips to Qualify for AR Financing

AR financing can be easier to obtain than a bank loan or other types of financing, especially for a small company that doesn't have a long track record in business. Because repayment of the loan depends on when your clients pay their invoices, their credit-worthiness may be more important to the financier than your business's when you apply for financing. But the overall health of your company is important, too. Here are some tips to help you qualify.

  • Send good invoices from good clients - You're most likely to get approved (and get more favorable terms) if the invoices you're borrowing against are from steady customers with good credit and a solid track record of paying their bills. If you can count any major corporations among your clients, that's even better. "It's a [better] risk if you're selling to Sears or other big names, compared to small or medium-size companies," says Atkinson of the CFA.
  • Make sure the invoices are not too old - Older invoices (60 or 90 days past due) are perceived to be riskier because they are less likely to be paid off. Many AR financing companies will charge higher interest rates for older invoices, or not finance them at all if they're more than 90 days old.
  • Assemble your financial information - While the quality of your invoices is of utmost importance to an AR financing company, the general health of your business will also affect your chances of getting approved. "The financing company will want to see it's a good long-term bet," says Atkinson, so you'll need to present a few years of financial statements for your business.
  • Check your tax returns - Like financial statements, these show how viable your business is in general. They're also important, says Atkinson, because lenders want to check if there's a lien on receivables to make sure they'll get their money. The government always claims first priority. AR financiers don't want to lend to a company that owes taxes.

Expert Q&A

Tim Atkinson directs membership, education and chapter support for the Commercial Finance Association. Read on for his tips on how accounts receivable financing can help your business thrive.

Is accounts receivable financing more common than it used to be?

Tim Atkinson:

In the last 20 years, it has grown. It used to be seen as something a business did when it was in trouble. Now people realize AR financing is a sensible means of managing cash flow. If you have good receivables from a good company, you should be looking at AR financing, or you might miss a good opportunity for financing your business in the best possible way.

How can a business use AR financing to manage its cash flow?

Tim Atkinson:

The working capital cycle is a circle. It starts when you say, "I want to manufacture something; now I need to buy the raw materials." You need to lay out money to pay for those materials, for laborers, and for manufacturing. When you sell your inventory, you might sell to companies that buy on credit, so you're waiting 30 to 60 days to get paid. But you spent your money 60 or 80 days ago, so there's a gap. It doesn't mean that your company is in terrible trouble, just that there's no cash to spend. When the cycle starts again, you can borrow against receivables because they have value.

How cost-effective is AR financing?

Tim Atkinson:

Large corporations will be doing AR financing at very attractive low rates. For smaller companies with higher risk, the rates can go up.

How does AR financing compare to the alternatives, especially for small businesses?

Tim Atkinson:

There's a big online lending market offering unsecured loans or cash advances. The APRs on those can be very high indeed—as high as 50 percent on a merchant cash advance. So the alternatives to AR financing can be hugely more expensive. Some small companies can get these [unsecured loans or cash advances] overnight. And some small business people can't think beyond tomorrow. They need to make payroll, so they will take that online loan now. That is generally not a good way to borrow, because that loan is not cost-efficient to pay off.

What should a business look for when choosing an AR financing company?

Tim Atkinson:

You want to look for someone who has taken the time to ask good questions and educate you on your financial options. Have a conversation that's less about "Sign this quick" and more about "Let's understand your needs."


Commercial Financing Association
CFA is the leading trade association for AR financing, offering training, networking, and other resources to professionals in the industry

CFA's Connected Community
Hosted by the CFA, this website connects potential borrowers with AR financing companies. All are members of the CFA.

Connects borrowers with AR financing companies and factors.

Connects borrowers with AR financing companies and factors. Also provides general information about how AR financing works and what to look for in a lender.

Better Business Bureau
This nonprofit organization rates businesses and tracks major complaints from customers

About the Author


Jennifer DeMeritt is a journalist and content specialist based in New York City. Her experience runs the gamut from high-end magazine work (managing editor and culture reporter for Gotham) to corporate communications for The Economist Intelligence Unit.