How to finance accounts receivable
You delivered the work. The invoice is out. And the cash sits in a customer's payment queue for the next 45 days while your payroll runs weekly. Accounts receivable financing exists for exactly this: converting money you have already earned into money you can actually use.
Short answer: there are two main ways to finance receivables. A receivables-based line of credit advances against your whole eligible A/R pool, commonly up to around 90%, and revolves as customers pay. Factoring sells or advances against individual invoices, typically at 80% to 90% upfront with the remainder, less fees, paid when the customer pays. Lines suit companies with $1M+ in receivables; factoring works at smaller scale and for younger companies.
What actually qualifies as financeable A/R
Lenders finance eligible receivables, and the definition is fairly consistent: invoices to other businesses or government payers, on standard net terms, less than 90 days old, for work already delivered. Progress billings, pre-billings, and consumer receivables are usually excluded or advanced at lower rates. Customer quality matters more than yours: an invoice to a national retailer or an insurer is stronger collateral than one to an unknown small shop, which is why companies with imperfect credit but strong customers finance receivables successfully.
Option one: a receivables-based line of credit
Your eligible A/R sets a borrowing base that is recalculated as you bill and collect. You draw when you need cash, interest accrues only on the drawn balance, and collections, usually routed through a controlled lockbox, pay the line down automatically. The facility grows with your billing, which makes it the structure of choice for growing companies. Pricing commonly runs in the low-to-mid teens annually in the private market. This is the core mechanism of asset-based lending; our ABL guide walks through borrowing bases in detail.
Option two: factoring
In factoring, a finance company advances against, or purchases, specific invoices. You receive typically 80% to 90% on day one and the balance, minus the factoring fee, when the customer pays. Fees are quoted per invoice per month rather than as an annual rate. Factoring shines where a line does not fit: startups without financial history, companies below $1M in receivables, high customer concentration, or industries like freight and staffing where it is a standard tool. Many companies start with factoring and graduate to a line as they scale.
How to choose between them
- Scale: under roughly $1M in A/R, factoring; above it, a line usually costs less and administers more cleanly.
- Consistency: steady monthly billing favors a line; lumpy or seasonal invoicing can favor factoring's pick-and-choose flexibility.
- Customer contact: factoring usually involves the factor in collections; lines with lockboxes are less visible to customers.
- Trajectory: if you expect to need inventory or equipment in the base later, start the ABL relationship now.
What it costs, honestly
Receivables financing is more expensive than a bank line and dramatically cheaper than the alternatives companies actually reach for, credit card float and merchant cash advances. The relevant comparison is not the rate against a bank line you cannot get; it is the financing cost against the margin on revenue you could not otherwise support, the contracts you stop declining, and the quick-pay discounts you stop giving away. A freight carrier giving 3% quick-pay discounts to get paid in 2 days is paying an effective annualized rate far beyond what a receivables facility costs.
Common questions
Can I borrow against my accounts receivable?
Yes, if you invoice other businesses or government payers on net terms. Receivables-based lines commonly advance up to around 90% of eligible A/R; factoring advances 80% to 90% per invoice. The receivables are the collateral, so business cash flow and customer quality matter more than your credit score.
What is the difference between factoring and A/R financing?
Factoring involves selling or advancing against specific invoices, with the factor typically involved in collection. A/R financing, in the line-of-credit sense, borrows against your whole eligible pool while you keep billing and collecting normally through a controlled account. Lines suit larger, steadier books; factoring suits smaller or younger ones.
Will my customers know I am financing receivables?
With factoring, usually yes; notices of assignment are standard. With a receivables-based line, customer visibility is minimal: payments route to a lockbox account in your company's name. If customer perception matters in your market, that difference often decides the structure.
My receivables are to one big customer. Is that a problem?
Concentration reduces some lenders' advance rates but does not close the market. Factors in particular routinely finance high-concentration books, and a single investment-grade customer can be excellent collateral. Expect the concentration to be priced and structured around rather than declined outright.
How fast can receivables financing be set up?
Factoring can fund first invoices within days. Receivables-based lines typically take two to five weeks depending on the diligence of the receivables and the condition of your reporting. An accurate A/R aging report is the single document that most accelerates the process.
Cash locked up in unpaid invoices?
Tell us where things stand. A Modavva advisor will review your situation confidentially, at no cost and with no obligation, and come back with whether and how it can be restructured. Typically a same-week first response.
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