What is accounts receivable financing and how does it work?

As a small business owner, unexpected cash shortfalls can occur at any moment. Financing options help you plug cash flow holes, but bank loan applications take a long time and quick cash infusion options come with high interest rates attached. And even if you decide to go another route, figuring out which of the many alternative funding options are right for you is a challenge in itself.

Accounts receivable (AR) financing might be your best option from the many small business financing choices. Not only can you access cash relatively quickly, but you won't have to bear high interest expenses. If your business sells on net-30, 60, or 90-day terms, accounts receivable (AR) financing can ease the cash flow crunch that comes with waiting for payment.

What is accounts receivable financing?

Accounts receivable financing is a form of funding where you use your unpaid invoices as collateral to get a cash advance, or sell them outright to receive funds faster. It converts receivables that would otherwise sit on your books for 30, 60, or 90 days into working capital you can use today.

Most B2B companies selling on credit terms use AR financing. The mechanic is straightforward: a lender advances a portion of invoice value upfront, then releases the remainder (minus a fee) once your customer pays. This type of receivables financing is particularly common among businesses with reliable customers but tight cash cycles. Finance teams looking to modernize how they handle expense management alongside receivables will find that pairing both disciplines creates a more complete picture of working capital.

How accounts receivable financing works

With AR financing, the money moves in two stages. First, the lender advances a portion of your invoice value. Then, when your customer pays the invoice, you receive the remaining balance minus the lender's fee. This structure lets you access cash in as little as 24 hours rather than waiting the full 30–90 day payment term.

Here's a quick example: on a $100,000 invoice with an 80% advance rate, you'd receive $80,000 upfront. When your customer pays, the lender sends you the remaining $20,000 minus their fee.

To get funded quickly, prepare your paperwork before you approach a lender. Follow these steps:

1. Gather your receivables and payment records

Gather your invoice processing data and related records. The AR financing company will eventually review these records to assess your eligibility.

2. Compare lenders and terms

You can choose from multiple lenders offering different financing options. Compare advance rates, fees, and funding timelines before choosing a lender. Banks typically offer AR financing with invoices as collateral, while fintech and specialist lenders may offer both financing and factoring with faster approvals.

3. Submit your invoices and documents

Submit all the documents the lender needs. The lender may ask for additional documents beyond the ones you gathered in the first step, including customer payment history and creditworthiness information.

4. Receive your advance

Once the lender approves your application, you'll receive your advance (typically 70–90% of invoice value) in your account, often within 24 hours.

5. Collect payments and repay the balance

You'll continue collecting payments from your customers. When they pay, you repay the lender the advanced amount plus any interest or fees, and receive the remaining balance. Automating routine finance tasks—including payment tracking—can reduce the manual overhead here; payroll automation is one example of how finance teams are cutting repetitive work across the board.

Types of accounts receivable financing

There are four main forms of receivables financing, each suited to different business needs:

Accounts receivable loans (asset-based lending)

Since accounts receivable is an asset, it can be used as collateral for an asset-based loan. With this option, you commit the majority of your outstanding receivables as collateral for a loan. The loan is recorded as a liability on your balance sheet and interest payments as expenses on your income statement.

Some lenders offer selective receivables financing, where you can earmark a few invoices to borrow against. This option functions similarly to an accounts receivable line of credit, giving you flexibility to draw funds as needed.

Invoice factoring

With [invoice factoring](https://ramp.com/blog/accounts-payable/what-is-invoice-factoring), you sell your invoices to a factoring company at a discount. The factor advances an agreed portion of the invoice value, then collects payment directly from your customer. Fees vary based on invoice size, customer creditworthiness, and how long the invoice remains unpaid.

The key trade-off is that the factor takes over collections and may contact your customers directly.

Invoice discounting

Invoice discounting works similarly to factoring, but you retain control of your sales ledger and collections. Your customers don't know a third party is involved, making it a more confidential option. Advance rates are broadly in line with other forms of AR financing.

Purchase order financing

Purchase order financing is distinct from accounts receivable financing. It provides funding to pay suppliers to fulfill a confirmed order before you've invoiced the customer.

Here's a concrete scenario: a distributor receives a large purchase order but doesn't have enough cash to pay the supplier. PO financing covers the supplier cost. Once the order ships and the invoice is issued, the business can transition to AR financing to bridge the collection gap.

Accounts receivable financing vs. factoring

Accounts receivable financing is not the same as factoring. With financing, you borrow against invoices and keep collections. With factoring, you sell the invoices and the factor collects.

Invoice factoring and AR financing are often used interchangeably, but they have different balance sheet implications. In the invoice factoring method, you sell your receivables at a discount to a buyer. With AR financing, you receive a loan while placing your invoices as collateral.

Once you factor your invoices, you offload the risk of customer default. With AR financing, you do not offload this risk and have to collect payment from your customers. Despite these differences, both options work for small businesses. But the "best" option depends on the state of your business and cash flow. A third (and less common) option is transactional funding, which involves using an intermediary to connect a seller and purchaser.

Pros and cons of accounts receivable financing

Pros

Relatively fast approvals and quick application process

Applying for and receiving AR financing is simple. Lenders will quickly arrange financing as long as you have all documents ready and a steady business track record. You will receive cash quickly and can deploy it in your business.

For instance, if you need a small infusion of cash to overcome seasonal variations, AR financing is a great choice.

Flexibility in choosing financing amounts and payouts

AR financing lenders often let you select which invoices you would like to borrow against. Thus, you can choose the amount you would like to borrow, giving you flexibility in structuring your balance sheet. Interest rates are also highly negotiable, giving you control over your interest expenses.

Maintain equity

AR financing helps you retain business equity. While it adds a liability to your balance sheet, you can mitigate this risk by carefully managing cash flow. For instance, you can finance invoices you're guaranteed to collect and reduce the risk of lengthy credit cycles.

Interest expense is a small price to pay if you use the lender's cash to generate greater ROI. You maintain control of your business and won't have to post valuable business assets as collateral, unlike with bank loans or traditional small business lenders.

Cons

Qualification might be tough

AR financing flexibility comes at a price: You must have a successful and lengthy business track record. Lenders will want to see a history of successful customer relationships and collections. Qualification might be unlikely if you lack this data or do not have a track record.

Reduces margins

Receivables financing creates interest expense and reduces your net margins. AR financing could leave you facing a loss if you're operating in a low-margin business. Also, if you think the economic conditions affecting your small business are changing, it's best to stay away from AR financing since the margin shrinkage might be too adverse to bear.

Customer dependence

Qualifying for traditional financing depends on your business' credit history. However, AR financing depends on your customer relationships and their history of paying bills. If you've worked with low-quality customers in the past, they will hamper your ability to qualify.

Thus, you're not fully in control of your financing qualification, something that is frustrating to most business owners.

Who should use accounts receivable financing?

You should use accounts receivable financing for your business if:

• You need cash quickly: Speedy timelines will ensure you receive cash injections right when you need them
• You want to avoid collection hassles: If you're tired of chasing clients for on-time payments, AR financing might be right for you. You can offer them more time to pay while mitigating late-payment risk.
• You have good credit history: To qualify for AR financing, you must have a good credit history. Credit history isn't the most important qualification factor, but you cannot have poor credit and expect to qualify.
• Customers have a record of repayment: If you have a good track record collecting payments from customers, an AR financing lender is more likely to approve your application
• Have a substantial business record: Have you been in business successfully for at least five years? If so, you stand a good chance of qualifying; if not, other financing options may fit better.

What lenders evaluate

Accounts receivable financing is based on the quality of your invoices, not just your own creditworthiness. Lenders typically assess:

• Invoice age: Most lenders exclude receivables more than 90 days past due
• Customer creditworthiness: Your customers' ability to pay matters more than your own credit in many cases
• Your business and personal credit: While secondary, your credit history still factors into approval
• Company size and track record: Established businesses with consistent revenue have an easier time qualifying
• Customer concentration: Lenders prefer diversified receivables rather than heavy reliance on a single customer

AR financing is a poor fit if you operate in a low-margin business where fees would eat into profits, or if you don't have a reliable collections track record to show lenders. Understanding how businesses are preparing finance teams for the future can help you evaluate whether AR financing fits into a broader, more resilient cash flow strategy.

Keep cash flowing without taking on debt with Ramp

AR financing solves a timing problem: cash tied up in unpaid invoices. Another way to ease that timing gap is to manage the cash you already hold more effectively while you wait for invoices to clear.

Ramp Business Banking pairs a Ramp Business Checking Account¹ with Cash Manager, which can sweep idle operating cash into the Ramp Business Investment Account⁴ and pull it back as bills come due. This can help finance teams manage liquidity without manual transfers.

More than 70,000 organizations have saved $12 billion and 27.5 million hours with Ramp. If you're looking for smarter ways to manage cash flow between invoice cycles, Ramp gives your finance team the tools to make every dollar count. Get started for free to see how Ramp can help your business make every dollar work harder.