What is accounts receivable financing?

Accounts receivable financing is a type of asset-based lending where a business borrows against its outstanding invoices, using receivables as collateral for a line of credit or loan. For professional service firms, AR financing provides working capital without selling receivables outright (as in factoring). The firm retains ownership and collection responsibility while accessing cash based on AR value, typically 70 to 85% of eligible receivables.

Key characteristics

• Uses receivables as collateral for borrowing

• Firm retains ownership and collection responsibility

• Typically advances 70 to 85% of eligible AR

• Interest is charged on the borrowed amount only

• More flexible than factoring for ongoing needs

• Requires regular AR reporting to the lender

Why it matters for professional service firms

AR financing provides working capital flexibility without the high cost of factoring or the permanence of term loans. Professional service firms with strong receivables can access cash when needed while maintaining client relationships (clients pay you, not a factor). The revolving nature works well for firms with fluctuating cash needs. AR financing costs less than factoring because you retain the collection risk and responsibility, making it suitable for firms with strong collection records.

Real-world example

Amanda's consulting firm had consistent $400K AR but periodic cash gaps when large projects required upfront investment. Factoring was too expensive for ongoing use. AR financing solution: established $300K line of credit secured by receivables (75% advance rate), drew only when needed, and paid interest only on outstanding balance. When a large project required $85K upfront, it was drawn against the line, then repaid as client payments arrived. Annual interest cost: approximately $4K on average balance, far less than factoring fees would have been. The flexibility supported growth without permanent debt.