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Accounts Receivable Financing

Accounts receivable (A/R) financing allows a business to quickly turn receivables into cash
  • Can take the form of factoring or borrowing against receivables
  • Factoring works well for businesses with short credit history that are ineligible for traditional bank financing
  • Sometimes financing companies fuse factoring with lending

What is accounts receivable financing?

Accounts receivable (A/R) financing – also known as invoice financing – is a type of financing that involves borrowing against outstanding receivables or selling them at a small discount to a factoring company. Factoring can be an attractive alternative to traditional bank loans especially for businesses that have a short credit history. Businesses may turn to A/R factoring when taking on projects that require upfront payments, working with large organizations that command longer net terms or funding a rapid expansion.

Accounts receivable factoring relies on the creditworthiness of the client, not your own, which can be a big advantage. This makes it an ideal tool for newer companies that do not have access to traditional bank financing, but work with larger, more established clients.

How does factoring work?

  • The factor is provided with a copy of the invoice that was sent to the client
  • The factor verifies the invoice and runs a credit check on the client
  • The factor advances a portion of the outstanding amount and holds the rest as reserve
  • Once the invoice is paid, the business gets the remainder minus the discount rate and any additional fees

Types of factoring

Recourse financing is similar to a short-term loan. If after a specified period the lender is not able to collect on the invoice, the invoice is charged back to the borrower who can pay it back or replace it with another one from a creditworthy client. The chargeback, however, is rare because the factor would do a credit check on your client before agreeing to purchase the receivables. This type of financing – which tends to feature lower fees – is good for factoring invoices of clients with whom a business has a long-standing relationship.

Conversely, in a non-recourse factoring situation, the receivables are sold to the factor who then becomes responsible for collection. Non-recourse factoring is beneficial because it transfers the credit risk to the factor in return for accepting the arrangement, the factor charges a higher discount rate than it would in a recourse factoring situation.

How much does it cost?

The answer to this question depends on the specific arrangement between the business and factor/lender. Generally speaking, fee structures for factoring arrangements vary from factor to factor and can be adjusted to suit client’s needs.

The advance rate on an invoice is typically between 70% and 96%. The rest of the invoice is sometimes held back as a reserve to cover disputes, payments less than the outstanding invoice amount, etc. The exact rate depends on the industry, client’s creditworthiness, how many invoices the business is looking to factor and their dollar amount, among other things. Factors sometimes also charge fees associated with due diligence, termination of the contract, monthly minimums, etc.

An example follows:

  • Invoice amount: $10,000
  • Advance rate: 85%
  • Reserve: $1,500
  • Fees: Flat fee of 2% for the duration of the arrangement
  • Other fees: $100 due diligence fee
  • Type of arrangement: Full recourse after 90 days

In this scenario, the client would only pay a one-time fee of $200 but would have the invoice charged back to him or her if the counterparty does not pay within 3 months. The factor also charges a $100 to conduct due diligence on client’s customer.

Some additional examples can be found on our Small Business Factoring page.

Types of borrowing against receivables

Borrowing against receivables can be done in the form of a loan or a credit line. In both cases, the lender would establish a borrowing base, which is the maximum amount the business can borrow. The borrowing base is calculated by discounting the value of the company’s most liquid assets, such as accounts receivable and inventory. The advance rate varies by type of asset and tends to be higher on accounts receivable and lower on inventory.

A typical advance rate for A/R factoring could be as high as 85% and 50% on inventory. However, most lenders will place restrictions on how much they advance against the following types of receivables:

  • Coming from foreign entities
  • Older than 90 days
  • Otherwise ineligible (in dispute, intercompany, unbilled, etc)

Additionally, many companies limit how much they lend against a book that contains a large percentage of receivables from one client. For example, if you have a portfolio of $10,000 of A/R and $6,000 of that comes from one company, a lender could decide to only extend credit against 30% of the invoice outstanding from that one client.

On inventory, lenders are usually willing to extend up to 100% against finished goods and 50% to 100% on raw materials. Work-in-progress, obsolete and foreign inventory are usually considered ineligible.

The borrowing base is generally recalculated on a daily, weekly or monthly basis. Upon recalculation, the lender issues a borrowing base certificate to signify compliance with the credit agreement and report the amount of collateral associated with the loan.

Example of a borrowing base calculation

April May June
1 Eligible accounts receivable $10,000 $11,000 $12,000
2 Loan Availability On accounts receivable (Eligible A/R by 85%) $8,500 $9,350 $10,200
3 Inventory:
4 Raw materials (100% eligibility) $2,000 $3,000 $4,000
5 Work-in-progress (ineligible) $550 $550 $550
6 Finished goods (100% eligibility) $1,000 $1,500 $2,000
7 Total eligible inventory $3,000 $4,500 $6,000
8 Inventory advance rate (multiply line 7 by 50%) $1,500 $2,250 $3,000
9 Inventory cap (maximum amount against which the client can borrow) $5,000 $5,000 $5,000
10 Loan availability on inventory  (the lesser of line 8 and 9) $1,500 $2,250 $3,000
11 Borrowing base for this report (sum of line 2 and 10) $10,000 $11,600 $13,200
12 Credit limit $15,000 $15,000 $15,000

In the example above, the lender has agreed to extend a revolving credit line of up to $15,000. The amount a business can borrow every month is determined by the borrowing base calculation that takes into account a large portion of client’s A/R and half of its eligible inventory.

Other types of accounts receivable financing

A financing company can extend a line of credit against receivables, which, upon closer examination, may turn out to be a factoring arrangement. In this case, the lender will actually purchase your invoices and the line – unlike traditional bank financing – will not have an expiration date.

Example of a hybrid transaction

  • Eligible accounts receivable: $10,000
  • Ineligible A/R: 15%
  • Advance rate: 85%
  • Interest/discount rate: 10% monthly until the invoice is collected
  • Type of arrangement: recourse but typically no maturity or expiration date

A hybrid facility is always recourse meaning that if an invoice is not paid by the client’s customer within a certain period of time – typically 90 days – the lender can charge back the unpaid obligation or wait until it is replaced with more creditworthy receivables.

In the example above, the business would pay $850 on a monthly basis to the factor or lender until the invoice is collected. A lender may hold back $150 as reserve or create a separate reserve account that could hold or accumulate a certain percentage of the total outstanding invoices.

The possibilities of how such a facility can be structured are endless. At Business Factors, we work with you to find the best option suitable for your business.

Advantages of factoring compared with a loan

Determining the type of accounts receivable financing depends on the business’s specific needs and market offering. However, compared with borrowing, factoring offers some advantages:

  • Factoring typically requires little paperwork and has a fast, 24-to-48-hour turnaround
  • Factors can provide additional services to the client, such as invoice processing, credit check on client’s customers and collections for the invoices they factor
  • Unlike bank lenders, factoring companies place less emphasis on a business’s credit score or credit history and are open to working with startups as long as they have pending invoices from creditworthy clients
  • Many don’t require monthly minimums or long-term commitments and factoring your invoices – unlike lending – does not increase leverage. Conversely, many asset-based loans often start with a borrowing base of $700,000 for credits that are extended for several years. This means you need to continue paying interest for the privilege of using it
  • Factoring companies don’t place restrictions on the use of proceeds. Bank loans on the other hand, often can only be used for the specific purpose they are provided for and contain covenants, which can limit the incurrence of additional debt, ability to make acquisitions and mandate EBITDA and interest coverage levels, to name a few


In summary, factoring is an increasingly popular solution to avoid cash crunches. It is a highly flexible and creative way to obtain working capital, without succumbing to the restrictions associated with traditional bank financing. Monetizing invoices can be done in as little as two days; there is no restriction on the use of proceeds or the operation of your business and many factors do not require monthly minimums or long-term commitments. Around $120 billion worth of invoices get factored every year in the U.S. alone and the global factoring market is estimated to be approximately $3 trillion.

Representatives are available 24/7 to answer any questions you may have on accounts receivables factoring. Call us today at 800-672-3844.