Accounts Receivable Financing Explained

If your business extends payment terms to clients — net 30, net 60, net 90 — you're sitting on a significant amount of capital tied up in unpaid invoices. Accounts receivable financing is the mechanism for unlocking that capital before your clients pay.

Two Ways to Finance Receivables: Factoring vs. AR Lines of Credit

Invoice factoring involves selling your receivables outright to a factoring company at a discount. The factor advances you 75–90% of the invoice value immediately, then collects directly from your client, and remits the remaining balance (minus their fee, typically 1–5% of invoice value) when the client pays. The key: the factor is buying a receivable, not lending against it — your credit matters less than your client's creditworthiness.

An accounts receivable line of credit is a revolving credit facility secured by your receivables. You borrow against outstanding invoices (typically 70–85% of eligible receivables) and repay as your clients pay you. Unlike factoring, your clients aren't notified — the relationship remains between you and your client. AR lines typically require stronger business credit and financial history than factoring.

Who Qualifies for AR Financing

Both factoring and AR lines are only available to B2B businesses (business-to-business) — companies whose clients are other businesses, government entities, or healthcare payers. Consumer-facing businesses can't factor consumer receivables for regulatory and practical reasons.

For factoring, the approval process focuses heavily on the creditworthiness of your clients (the companies paying your invoices) rather than your own credit. A startup with great enterprise clients can often factor invoices that a more established business can't get an AR line against. This makes factoring particularly valuable for growth-stage B2B companies.

The Real Cost of Factoring

Factoring fees are quoted as a percentage of invoice value per time period — typically 1–3% for the first 30 days, with additional fees if the invoice goes beyond that. On an annualized basis, this is expensive: 2% per 30 days = roughly 24% APR. But comparing factoring to a term loan APR is misleading — factoring replaces your collections function, advances capital without debt on your balance sheet, and scales automatically with your revenue.

A more useful comparison: is the cost of factoring lower than the cost of slow cash flow? If outstanding invoices are causing you to miss growth opportunities, pass on new clients, or pay vendors late — the factoring fee may be the cheapest capital you can access relative to the problem it solves.

When AR Financing Makes the Most Sense

AR financing shines in three scenarios: rapid growth (you're winning clients faster than you can collect payment), long payment cycles (government contracts, healthcare, net-60 clients), and situations where you've maxed out traditional credit and need additional working capital without adding balance sheet debt.

It's less ideal when your clients pay quickly (under 30 days), your invoice amounts are very small (under $5,000 per invoice), or your margins are too thin to absorb the factoring fee. In those cases, a working capital loan or line of credit is usually a better fit.