This post was originally published in April 2021 and was updated in May 2025 with additional information on how AR financing powers business growth and includes an expanded FAQ section.
What is accounts receivable financing?
Accounts receivable financing, also called invoice financing, is the process of receiving capital based on a portion of a company’s accounts receivable. The financing is usually structured as either a loan backed by the accounts receivable or as an asset sale that gives the financing company the right to collect the accounts receivable.
Who uses accounts receivable financing
Accounts receivable financing can be used by any business big or small that wants to trade their accounts receivable assets for cash.
Accounts receivable lending represent a risk as assets, because there is a chance that they will not be collected. Converting accounts receivable to cash via a loan or asset sale is a way to mitigate the risk of non-collection.
It’s also a tool that can be used by companies who need cash quickly. Accounts receivable financing can get them cash immediately, though almost always less money than the total value of the accounts receivable assets.
Factoring of accounts receivable
Accounts receivable factoring is the process of buying a company’s accounts receivable for cash, usually at around 90% of the value.
Factoring companies and platforms look to buy short term receivables from companies, sometimes as soon as an invoice is created. In the business-to-business world, most companies invoice each other with long terms, generally between 30 and 90 days. When the supplier delivers a good or service to their customer, it costs them money to do so. If they aren't paying for their goods or services until 30 or 90 days later - that can create major cash flow problems.
Factoring platforms ensure that companies are immediately paid for the goods and services that they invoice. The invoice factoring platform pays the supplier less than what the total receivable is worth and then hopes to make a profit after collection.
Invoice factoring accounts receivable comes with default risk. The accounts receivable have a chance of being paid late or going unpaid completely with the factoring company taking the financial hit.
Accounts receivable financing vs factoring
Accounts receivable financing is distinct from factoring in who controls the collections process. In account receivable financing, the business maintains control of the receivables it has borrowed against and collects on them. In factoring, the factoring company purchases the unpaid invoices and takes charge of collecting on them.
Understanding accounts receivable financing
Accounts receivable financing (or AR financing) can take two different forms: Loans or Asset Sales.
In a loan arrangement, known as invoice discounting, a financial institution will make a loan to a business that is backed by the business's accounts receivable assets. Those assets are put up as collateral on the loan and if the business fails to repay the loan, they will be turned over to the lender.
Accounts receivable assets are not the same as cash, of course. If the lender did foreclose on the company's accounts receivable they would still need to go through the process of collecting the owed money that the accounts receivable represent.
In an Asset Sale, a factoring platform or other financing company will buy another company's accounts receivable assets outright, generally for around 90% of the price. The factoring platform hopes to collect the accounts receivable in a timely manner and make money on the difference between the purchase price and the total value of the accounts receivable collected.
Most businesses don’t make loans. But banks, credit unions and other financial institutions make it the core of their business. A loan made is accounted for as a “loans receivable” not as an accounts receivable.
Outstanding invoices
An outstanding invoice is a bill that has been sent to a customer for a delivered good or service that has not yet been paid. Having outstanding invoices exposes a business to risk because the business has invested cash in delivering the customers order, but has not yet seen revenue on the transaction.
Many business-to-business invoices are payable within 30, 60 or 90 day terms. Businesses can get their outstanding invoices paid soon by more quickly delivering invoices, accepting a wider range of payment types, offering incentives for paying early and by maintaining good relationships with their customers.
Purpose of receivable financing
Accounts receivable financing allows companies to shore up their cash flow, reduce the risk on their balance sheets and finance new initiatives. They are trading the future value of their accounts receivable portfolio for immediate cash. According to the Time Value of Money, money now is worth more than the same amount of money in the future because it can be used with more certainty and flexibility.
Working capital
Businesses need enough readily available cash or working capital to pay their employees, expenses, debt obligations and any investments they make in customer orders. If a company makes an unusually large amount of sales in one month that can present a working capital problem. They will need to invest large sums of money to complete and deliver customer orders, but may not be paid for those orders for 30, 60 or 90 days.
Accounts receivable financing can be a good way for a company to acquire the working capital it needs to maintain operations and grow their sales.
Purchase order funding
Purchase order funding is distinct from Accounts Receivable financing. In purchase order funding, a company receives a loan that they use to produce a customer’s order. Purchase order financing can increase a company’s cash flow, just like accounts receivable financing does, but the cash flow increase occurs earlier in the sales process.
How to structure accounts receivable financing
Almost every type of receivable from a reputable and creditworthy company is eligible for financing. But there are some noteworthy exceptions:
- Receivables that are majorly past due are not eligible for financing.
- Receivables that are under dispute from a customer are not eligible for financing.
- Receivables from a customer that is bankrupt or in the process of declaring insolvency are not eligible for financing.
- Receivables that have been billed but are associated with goods or services that have not been delivered are not eligible for financing.
- Receivables that are due from consumers are not eligible for financing.
- Receivables from a customer that is past due on other invoices are not eligible for financing.
These types of receivables represent too great a risk to financiers to make loans against. Accounts receivable financing companies are looking for reliable sources of future revenue to finance against.
Accounts receivable loans work like most loans, but they use a businesses unpaid invoices as collateral. The financing company will lend the borrowing company a lump sum of money - giving them instant cash. The borrower may be charged a fee between 1 and 5 percent of the total loan amount dependent on their size and creditworthiness.
As the collateralized invoices are paid, the borrowing company sends the money to the financing company. After all collateralized invoices have been paid, the financing company pays the balance of money above the loan amount and minus the fee back to the borrower.
How AR financing powers business growth
Finance leaders continually seek solutions to optimize cash flow and strengthen their working capital management. Accounts receivable financing offers several compelling advantages for businesses looking to accelerate their cash conversion cycle:
Accelerated cash flow
AR financing provides immediate working capital without waiting for extended payment terms to expire. Instead of managing 30, 60, or 90-day payment cycles, businesses convert outstanding invoices to cash within days, supporting inventory purchases, payroll, and growth initiatives. This shortened cash conversion cycle gives companies greater financial flexibility and control.
Enhanced cash flow predictability
Even successful businesses face cash flow fluctuations from seasonal demands, sales cycles, and growth opportunities. AR financing smooths these inconsistencies by providing reliable access to funds when needed most. Companies can maintain stable operations during revenue gaps and pursue strategic opportunities without disruption.
Scalable financing without traditional constraints
Unlike loans with fixed limits, AR financing scales with your business growth—as sales increase, so does your access to capital. Companies can continuously submit new invoices as collateral without frequency or volume restrictions. This responsive approach is ideal for businesses experiencing rapid growth or facing unexpected opportunities.
Why Billtrust: Leading the AR automation revolution
Billtrust is a leading provider of order-to-cash solutions that help businesses accelerate cash flow. For over two decades, we've empowered finance teams to control costs, increase productivity, and enhance customer satisfaction through innovative AR automation. Our platform streamlines the entire accounts receivable process—from credit management and invoicing to payment processing and cash application—helping businesses of all sizes transform their financial operations.
Billtrust combines cutting-edge technology with deep financial expertise to deliver solutions that drive measurable business outcomes. Whether you're looking to streamline invoicing, optimize collections, or gain deeper financial insights, our AI-powered platform provides the tools you need to make smarter financial decisions and maximize your working capital.
Frequently Asked Questions
Accounts receivable finance is a funding solution where businesses convert outstanding invoices into immediate cash by either borrowing against them or selling them to a financing company. This approach allows companies to access capital without waiting for customers to pay their invoices. Rather than enduring long payment cycles, businesses can accelerate their cash flow and maintain stronger working capital ratios.
Unlike traditional loans that evaluate your entire business creditworthiness, accounts receivable financing focuses primarily on the quality of your invoices and your customers' ability to pay. This solution typically offers faster funding, greater flexibility, and scalability that aligns with your sales growth. AR financing also doesn't create long-term debt on your balance sheet, as the transaction is secured by your existing assets.
Companies with extended payment terms, seasonal fluctuations, or rapid growth opportunities typically benefit most from accounts receivable financing. B2B businesses in manufacturing, transportation, healthcare, and distribution sectors often leverage AR financing for healthy supplier relationship management. Any company seeking to accelerate cash flow without adding traditional debt can find strategic advantages in accounts receivable financing.