Accounts Receivable Financing: The Complete Guide

You deliver goods or complete a service and invoice a business or government customer on credit terms. The financing provider advances a percentage of that invoice, commonly 70% to 95% depending on the product and industry, usually within a few business days for a new facility and same-day to 48 hours once the facility is established and the invoice is verified. The provider (in factoring) or you (in an AR loan) collects from the customer, and the remaining balance, minus fees, is released.

The headline advance rate is not the number you should plan around. Lenders and factors work from an eligible receivable base, not gross invoices:

Gross trade accounts receivable
- AR over the aging limit
- cross-aged customer balances
- concentration excess
- disputed, contra, affiliate, unbilled, future, foreign, retainage, and progress-billing AR
- credits, returns, rebates, offsets, and dilution reserve
= eligible AR

Eligible AR x advance rate
- lender reserves
- existing advances / loan balance
= current availability

Run an example: $1,000,000 gross AR, $100,000 over the aging limit, $80,000 concentration excess, $40,000 in disputes and credits, an 85% advance rate, and a $25,000 reserve. Eligible AR comes to $780,000. Gross availability is $663,000, and after the reserve, actual availability is $638,000, which is only 63.8% of gross AR, not the 85% headline rate.

Ten things change what a lender or factor will actually quote you, more than your own credit score does:

1. The account debtor's credit, not yours. Public-company, government, and investment-grade customers price better.
2. Concentration. A single customer above roughly 20%-30% of eligible AR in an ABL commonly triggers a concentration reserve.
3. DSO and stated terms. A net-90 invoice costs roughly three times a flat 30-day rate before tier changes.
4. Aging. Receivables past 90 days or three times normal terms are typically ineligible, and can drag a whole customer's balance out of the base.
5. Dilution. Returns, credits, disputes, and bad debts reduce collections below face value; regulatory guidance treats 5% or less as a usual expectation, not a safe harbor.
6. Recourse. Seller recourse lowers the factor's risk and normally lowers price.
7. Verification burden. Timesheets, proof of delivery, purchase orders, and acceptance certificates lower fraud risk; unbilled or milestone receivables price worse.
8. Volume and commitment. Whole-ledger, predictable volume earns lower unit fees; spot flexibility costs more.
9. Lien position. A clean first-priority lien is cheaper; an existing blanket UCC filing or tax lien needs a payoff, release, or subordination first.
10. Your financial strength. Profitability is not always required, but chronic losses, unpaid payroll taxes, and weak controls raise price or cause rejection.

Skip it if the underlying problem is thin margins or a business that cannot service debt at all; a financing fee just adds cost on top of an unsolved problem. Skip whole-ledger factoring if your ledger has heavy customer concentration above the provider's cap, since it will cap the facility or kill the deal outright. Skip non-recourse factoring if you are relying on it as blanket insurance: it usually covers only an approved debtor's credit failure, not disputes, offsets, returns, or fraud. And skip financing construction, Medicare, or federal-contract receivables through a generic provider; these have specific assignment, retainage, and setoff rules (Assignment of Claims Act for federal work, anti-assignment rules for Medicare) that a generalist facility is not built to handle.

A few legal points that change outcomes but rarely make it into a sales pitch. Under UCC 9-406, your customer can keep paying you until it receives proper notice of the assignment; after that, paying you instead of the factor generally does not discharge the debt, which is why diverting a customer's payment after notice is treated as a serious default. Under UCC 9-404, the factor generally takes the invoice subject to your customer's existing defenses, offsets, and disputes, so a clean-looking invoice is not an unconditional payment obligation. An existing blanket lien from your bank has to be paid off, released, or subordinated before a factor can take first priority; a factor's purchase language does not automatically leapfrog an earlier perfected lien. And several states, including California, New York, and Utah, now require standardized commercial-financing disclosures (funds provided, total dollar cost, term, and in some cases an annualized rate) for offers under set thresholds, so ask for the state-mandated disclosure and reconcile it against the actual agreement rather than the marketing rate.