Accounts receivable financing

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Page written by Michael David. Last reviewed on February 26, 2026. Next review due October 1, 2027.

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If you’ve ever looked into business financing, you may have run up against the requirement for collateral. While that usually means pledging real estate or other property as security for the loan, your outstanding receivables might also do the trick. Keep reading for more.

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What is accounts receivable financing?

Accounts receivable financing means using your unpaid invoices as collateral to borrow money. If your business sends out invoices on a regular basis, accounts receivable financing is like having access to a series of cash advances secured by those invoices. Accounts receivable financing can help businesses manage their cash flow by allowing them to turn invoices into cash almost immediately.

How does accounts receivable financing work?

Accounts receivable financing can be part of your overall working capital strategy. Although you might use a small business loan or line of credit for major business investments, accounts receivable financing can be a useful way to accelerate the cash flow coming into the business on a weekly or monthly basis.

Although various providers will work in different ways, here’s a typical accounts receivable finance workflow:

You invoice your client and copy the finance company. Say you issue an invoice for $30,000 with 60-day repayment terms. You’ll send a copy to the client and a copy to the finance company.
You receive funds from the lender. The funds you receive will be a percentage of the invoice you issued. If you were approved for an 80% advance, that $30,000 invoice would net you $24,000 right away.
You collect payment from your customer and repay the loan with interest. It’s not uncommon for interest to be charged on a weekly basis. Let’s say your customer paid the $30,000 invoice after three weeks, and the interest charge was 3% per week. You would owe the lender $900 per week times three, or $2,700 in interest. So you would repay the $24,000 advance plus $2,700 interest, and that would leave you with $27,300 out of the original $30,000 invoice.

The nice thing about accounts receivable financing is it’s quick, easy, and it may not show up on your balance sheet like traditional debt. This means it shouldn’t affect your ability to qualify for other types of financing. The one caution with accounts receivable financing is that the weekly fees can be equivalent to an extremely high annualized interest rate, so you must be aware of the total cost of borrowing.

What are the three primary types of receivables finance?

There are many nuances in the world of lending, including different approaches to accounts receivable finance. Here are three of the main categories:

Asset-based lending refers to conventional forms of finance like business lines of credit and commercial lending. If you have accounts receivable, you may be able to pledge them as collateral for this type of borrowing. This approach is generally not very flexible. You’ll likely have to bundle up the majority of your receivables and commit them to the lender.
Invoice factoring refers to selling your accounts receivables to a funder who will be responsible for collecting payment from your clients. In the meantime, they will advance you a significant portion of the invoice value upfront — typically 70% to 90%. These arrangements can be quite flexible, as they may allow you to pick and choose which receivables to factor, but fees can add up quickly.
Invoice discounting is similar to asset-based lending in the sense that you are using your receivables as collateral for a loan, but invoice discounting tends to be a much more nimble process. You can typically choose which invoices you wish to finance and receive cash advances against them quickly, albeit with a discount or fee deducted from the net amount you keep in the end.

Accounts receivable financing vs. factoring

With invoice factoring, you are selling your invoice to someone else. It then becomes their responsibility to collect money from your client. Invoice factoring comes in two varieties: “recourse” factoring, where you remain on the hook for any non-payment by the client, and “non-recourse” factoring, where the factoring company takes the risk.

With accounts receivable financing, you retain ownership of the invoice and remain responsible for collecting payment from your client. You just use the invoice as a tool to secure short-term funding from a lender while you wait to collect. This is a confidential process and your clients will not be made aware of your financing arrangements.

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Written by

Michael David

Michael David is a financial writer and former investment advisor. Writing for Capital Group, Dimensional Fund Advisors, Franklin Templeton Investments, HSBC, Invesco, PIMCO, Vanguard, global insurance companies, major banks and others, he has educated professionals, business owners and consumers about strategies for investing, insurance, banking and corporate finance for more than 20 years.

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