Your customers pay you on-time all the time. Right?

If you’re like most small business owners, you probably have a few slow paying customers!

What do you do when your customer’s pay invoices slowly? Seventy-nine percent of small business owners cut their own pay and 17 percent of small businesses cut spending on inventory.

Even if your customers pay on time, you may need to extend generous payment terms in order to secure business with them. This is often the case when you work with government agencies and large corporations.

If your business’s cash is tied up in accounts receivable, consider applying for an A/R credit line.

What Is an A/R Credit Line?

You’ve probably heard of accounts receivable financing. This term is actually a general description of different methods that leverage your unpaid invoices for cash. In this post, we will focus on accounts receivable lines of credit that use unpaid invoices as collateral.

An A/R credit line allows you to borrow against outstanding invoices while retaining ownership of the invoices. You can use the line of credit for any of your business working capital needs from meeting payroll to paying your suppliers.

As you shop around for an A/R credit line, there are a few important terms to know.

A/R Aging Report

This is simply a list of unpaid customer invoices. The use of the word aging refers to how long the customer payment has been outstanding. For example, 30 days. Typically, accounting software will show you unpaid A/R categorized by how “old” the invoice is. Is it 30, 60, 90 or over 90 days old?


This is another method to turn unpaid invoices into cash. A factoring company buys your unpaid invoices from you. Your unpaid receivables are acting as collateral until you pay back a loan. Any communication with your customer about collection is done by the factoring company. If the customer doesn’t pay, the factoring company takes the loss.

Factoring can be perceived negatively by your customers as it indicates your business is desperate for cash.

Asset-based Lending

A/R credit lines are a type of asset-based lending. This means a loan or line of credit secured by business assets like inventory.

Face Value

The amount of an invoice. This is the amount you billed your customers. If you billed your customer $10,000, then the face value of that invoice is $10,000.

Advance Rate

Lenders will assign an advance rate to the face value of your unpaid invoices.  The advance rate is the percentage of the face value that determines your spending limit.  Your customers that have a strong business credit rating will command a higher advance rate. Typical advance rates range from 70 to 100 percent.

Below we will review all the need-to-know information for business owners considering an A/R credit line.

How Does Accounts Receivable Financing Work?

After lenders approve your A/R credit line application, you will have access to a line of credit with set spending limit.  As you need funds, you initiate a draw request and the lender transfers funds to your business banking account within a couple of days.

When your application is approved, the lender will establish the rate at which fees will be charged. Typically, lenders charge you fees weekly based on the dollar amount of outstanding invoices.  The longer it takes your customers to pay, the more you will pay to the lender. The amount of the fee varies broadly based on the quality of your customers.

It is important to calculate the cost of any financing tool as an annual percentage rate (APR). Fees presented by lenders may seem extremely low at first glance. Some lenders charge less than 1 percent per week while invoices are outstanding. When you convert this weekly fee into APR, you may find the rate to be anywhere between 13 and 60 percent.

Note that some lenders will also have a minimum repayment period, i.e. no matter how quickly you collect your customer payments, your lender will want to deduct 3 weeks of fee payments.  This assures the lender that they are able to profit from the transaction with your business.

A/R lines of credit are a form of short-term financing. As such, repayment of the credit line will be within a 12-month period – some lenders require payment is as little as 3 months.

While most lenders require you to communicate and collect payments from your customers as you normally would, some require your customers pay the lender directly. This should be a consideration in your choice of lender – do you want your lender impacting your customers’ experience with your business.

After you collect payment from your customers, you repay the lender including their fee. In the case where the lender collects directly from your customer, the lender deducts their first and then sends you any remaining amount of invoice. If the customer doesn’t pay, you are still responsible for payment to the lender. 

What Types of Businesses Benefit from Accounts Receivable Loans?

Most businesses that use A/R credit lines are business to business companies or business to government companies. It is rare that a B2C company would use A/R financing.  Business selling products or services are eligible for an A/R credit line.

Common characteristics among businesses that benefit from accounts receivable loans are:

  • Businesses with local, state, or federal government customers
  • Businesses with large corporate customers

Government agencies and large corporations are often reliable, yet slow, payers. Businesses with these types of customers are well positioned for an A/R credit line. Two industries that use A/R credit extensively are construction companies and staffing agencies.

In both instances, you are most likely paying your employees before you get paid by the customer.

Who Qualifies for Accounts Receivable Funding?

Unlike many other types of credit, your personal or business credit score does not play a big role in a lender’s decision to lend against your invoices. The primary factor in their decision is the business credit rating of your customers.  Some, but not all, A/R lenders require a minimum credit score.

Most A/R lenders require a minimum amount of annual revenues. This varies widely from $50,000 to $500,000.

The required minimum time in business is low compared to other types of financing. This also varies by lender, but it could be as low as two months of operating history.

Many A/R credit line lenders require you to be using compatible accounting software, like Quickbooks.  These lenders will ask to sync with your accounting software. If you don’t have compatible software, you may be able to enter invoice information manually or upload copies of your outstanding invoices.

The dollar amount of your invoices and the quality of the customers are the most important qualifiers. While lending decisions often consider the quality of your customers, the A/R credit line is unique in that your customer’s credit rating is more important than yours.

What Is the Application Process for A/R Financing?

The application process for an A/R credit line may be the easiest loan application process out there – with the exception of credit cards. Most lenders have an online portal to manage your application from beginning to end.

The first step is for you to choose which invoice or invoices you want to put up as collateral for your line of credit. You may have many customers that pay as scheduled, but then have one big contract with a government agency that stresses your cash flow. You can select which invoices are used as collateral.

The second step is to identify the right A/R line of credit lender. As you do your research you will find that some lenders are better suited to larger companies and others are better suited for smaller companies. Client link.  Applications will differ but you can expect that most will require the following:

  • EIN
  • Bank statements
  • Valid driver license
  • A/R aging report

After submitting the application, lenders should respond to you in a couple of days. Review the terms of the approval. It’s important that you understand the terms of repayment including the period of time you have to repay as well as the cost structure. Be sure to convert total costs into an equivalent APR.

What Are the Advantages of an A/R Credit Line?

There are many advantages to accounts receivable lines of credit. Of course, these advantages come with a higher price tag.

  • Easy to qualify even if your credit isn’t perfect
  • Rates and fees are based on your customer’s creditworthiness, not yours
  • You maintain ownership of your invoices
  • You maintain control over the collection process and customer experience
  • Early payoff typically saves your money
  • Additional collateral not required
  • Leverage unpaid invoices for immediate cash

It’s important that you work with your accountant to understand if your A/R credit line is an on- or off-balance sheet items.  This may impact whether this is the right financing vehicle for you.

What Are the Disadvantages of an A/R Credit Line?

Choosing an A/R credit line typically will cost you more than choosing a traditional financing vehicle. This reflects a difference in perceived risk by the lender. When you get conventional financing, it is often secured with multiple assets, not just account receivable.

Depending on how your lender manages repayment, your customer may know that you are using A/R credit line. There is nothing inherently negative about this, but it’s a consideration for some businesses.

Is an A/R Credit Line Right for Your Business?

Above we reviewed which businesses benefit from account receivable financing. For some businesses, it’s a matter of survival. These businesses may have an A/R credit line in place at all times.

For other businesses, it may be more a matter of an opportunity. Perhaps you have a supplier that is offering a limited time discount on raw materials. Or a great project comes your way unexpectedly that you can only take on with an extra cash infusion. Whatever the reason, having immediate access to cash is never a bad idea!