TL;DR: Accounts receivable (AR) financing helps B2B companies unlock cash from unpaid invoices to improve cash flow, stabilize, and fund growth, making it a practical step toward eventually qualifying for traditional bank financing.
There are many reasons a company can’t qualify for a business loan from a bank - time in business, credit ratios out of formula, lack of profitability, fast growth, complex ownership structures, and more.
In these cases, when a business needs capital to grow, purchase raw material, rent or buy new office space, hire employees, etc. – how do they get the funds?
For business-to-business (B2B) companies that issue invoices to their customers, accounts receivable (AR) financing could provide a path to qualifying for a business loan.
AR financing is a funding solution that unlocks cash tied up in unpaid invoices. The business sells its outstanding invoices to an AR financing company for an agreed-upon percentage of the invoice amount, giving the business immediate access to cash. Once the invoice is paid, the remaining balance, minus a fee, is funded back to the business.
The most common form of AR financing is invoice factoring. When the company sells its invoices, the factoring proceeds are deposited into the company’s bank account. As business and invoices grow, deposits grow.
Asset-based loans are a type of AR financing that behaves more like a line of credit. Assets used as collateral can include accounts receivable, equipment, inventory, and other items.
Unlike banks, AR financing companies rely less on the business's creditworthiness and more on the creditworthiness of the business’s customers.
Many of the scenarios that prevent bank loan approvals don’t disqualify companies from AR financing.
AR financing gets a company paid faster than waiting for customers to pay their invoices. Faster payments result in improved cash flow.
Accounts receivable grow as the company sells more goods and services. This growth means you have more invoices and larger invoice amounts to sell, so you receive larger advances to accommodate that growth.
In one case, a bank referred a growing equipment service company to CFI when the business needed additional working capital to support rapid growth, but didn’t meet the bank’s lending criteria at the time.
Through AR financing, the company was able to access the cash tied up in its receivables, improve cash flow, and continue scaling operations—without disrupting its existing banking relationship.
This type of partnership allows banks to support their clients’ immediate needs while positioning them for stronger financing opportunities in the future.
Because AR financing improves cash flow, it enables the business to grow revenue and profitability. Over time, improved cash flow consistency, stronger financial statements, and better operating history help businesses meet the underwriting standards banks require.
Many companies that did not qualify for bank loans used AR financing for a couple of years and, after becoming established and demonstrating positive revenue and profit growth, qualified for a bank loan or line of credit.
In short, AR financing does the following:
While AR financing is a powerful tool for improving cash flow and supporting growth, it’s important to understand the associated costs and structural considerations.
Compared to traditional bank financing, AR financing typically carries higher fees. This reflects the increased flexibility, faster access to capital, and broader approval criteria. For many businesses, especially those that don’t yet qualify for bank financing, the ability to access working capital outweighs the additional financing cost.
Additionally, depending on the structure, customers may be aware of the financing arrangement, as payments are often directed to the financing provider. For companies that prioritize customer experience, it’s important to choose a structure and partner that align with how you want to manage your customer relationships.
Finally, transitioning from AR financing to a traditional bank loan can take time. The timeline varies depending on how quickly the business strengthens its financial profile by improving profitability, stabilizing cash flow, and meeting key banking ratios. As those fundamentals improve, so does the likelihood of qualifying for lower-cost bank financing.
If your business is growing but constrained by cash flow or bank requirements, AR financing may be a practical next step.
Have a client who isn’t ready for bank financing? CFI can help.