Accounts Receivable Financing
Definition
Accounts receivable (AR) financing is a broad category of funding that allows businesses to borrow against or sell their outstanding invoices to access cash before customers pay. AR financing includes invoice factoring (selling invoices), invoice discounting (borrowing against invoices while retaining collection responsibilities), and AR lines of credit (revolving credit based on receivable balances). This type of financing is particularly valuable for B2B businesses with long payment cycles (Net 30, 60, or 90 terms) that need cash now rather than waiting weeks or months for customer payments.
Example
A staffing agency with $800,000 in outstanding invoices (Net 45 terms) establishes an AR line of credit at 85% advance rate. They can draw up to $680,000 at any time, paying interest only on what they use, with automatic repayment as invoices are collected.
Related Terms
Advance Rate
The advance rate is the percentage of an asset's value or a business's monthly revenue that a lender...
Invoice Factoring
Invoice factoring is a financing arrangement where a business sells its outstanding invoices (accoun...
Working Capital
Working capital is the difference between a business's current assets (cash, accounts receivable, in...
Net 30
Net 30 is a payment term indicating that the full invoice amount is due within 30 calendar days of t...
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