What is AR financing?

Accounts receivable financing is a broader category of working-capital funding in which a lender uses a business's outstanding invoices as collateral. Unlike factoring, which sells the invoices outright, AR financing leaves ownership with the business. The lender advances a percentage of eligible receivables as a line of credit, and the business repays from the cash that comes in as customers pay.

AR financing is typically cheaper than factoring for businesses with strong AR and steady collections, because the lender is not taking on the customer relationship or the collection risk directly. It also preserves the direct line to the customer, which matters for relationship-driven industries where handing off collections to an outside party would signal trouble.

The quality of the AR matters. Lenders look at DSO, concentration risk, aging distribution, and dispute rates before setting the advance rate. A business with a clean aging report and a short DSO typically borrows at a better rate than one with a long tail of aged invoices. That alignment is why lenders and AR automation providers are often talking to the same customers.