What is the cost of accounts receivable financing?

Interest rates for AR financing typically range from 5-15% annually, plus administrative fees. Rates depend on the quality of receivables, borrower creditworthiness, and market conditions. AR financing is generally cheaper than factoring because the lender has recourse to both the receivables and the borrower.

Do my customers know about AR financing?

Generally no. Since you retain ownership of invoices and continue collecting payments, customers typically are not notified. The lender may file a UCC lien or equivalent security interest publicly, but there is no direct communication with your buyers about the financing arrangement.

What receivables qualify as eligible collateral?

Eligible receivables are typically current invoices less than 60-90 days old, from creditworthy customers, free of disputes and liens. Invoices from affiliated companies, government entities in some cases, and foreign buyers may be excluded or receive lower advance rates.

Financial IntelligenceBeginner4 min read

What Is Accounts Receivable Financing?

Learn how businesses use their unpaid invoices as collateral to secure loans or lines of credit for immediate working capital.

Key Takeaways

Accounts receivable financing uses unpaid invoices as collateral for a loan or line of credit rather than selling them outright.
Unlike factoring, the business retains ownership of the invoices and the customer relationship.
Advance rates typically range from 70-85% of eligible receivables, with interest charged on the drawn amount.

How AR Financing Works

Accounts receivable (AR) financing allows businesses to borrow against their outstanding invoices. A lender evaluates your receivables portfolio and extends a loan or revolving line of credit, typically advancing 70-85% of eligible invoice values. You continue to collect payments from customers and use those collections to repay the lender. Unlike factoring, you do not sell the invoices; they serve as collateral. Interest is charged on the outstanding balance, similar to a traditional loan.

AR Financing vs Invoice Factoring

The key distinction is ownership. In factoring, you sell invoices and the factor collects payment directly from your customers. In AR financing, you retain the invoices and the customer relationship; the lender has a security interest but does not interact with your buyers. AR financing offers more control and is often less expensive for businesses with strong receivables. However, it requires more robust financial reporting and typically involves ongoing audits of the receivables pledged as collateral.

Eligibility and Limitations

Lenders assess the quality of your receivables portfolio. Eligible receivables usually exclude invoices over 90 days past due, invoices from related parties, disputed invoices, and those subject to offsets or contra arrangements. The concentration limit prevents too much exposure to a single buyer. Lenders also evaluate your industry, customer creditworthiness, and historical collection rates. Businesses with diversified, creditworthy customers and consistent payment histories obtain the best terms and highest advance rates.

AR Financing for African Businesses

Access to AR financing is expanding in Africa through both traditional banks and fintech lenders. South African banks like Nedbank and Standard Bank offer structured AR facilities. In Nigeria, fintechs are using technology to assess invoice quality and automate lending decisions, reducing processing times from weeks to days. For African businesses supplying multinationals or government entities with reliable payment records, AR financing provides a non-dilutive way to fund growth without giving up equity or taking on traditional term debt.

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