One of the oldest ways of commercial financing is through accounts receivables. This is a process whereby a company receives financing capital after selling their outstanding invoices or receivables account receivables to a finance company, usually referred to as the factor. The factor assumes the receivables’ risks to issue businesses with cash depending on receivables’ quality and age. Read on for more insights.

Account Receivable Financing and Small Businesses

In most cases, small businesses owners find it difficult to access various forms of business financing such as credit. However, small businesses need extra funds to grow and also prevent cash flow shortages. As a result, small business owners utilize their accounts receivable books to secure financing. 


Businesses can access accounts receivable financing through different financing structures such as:

Asset Sales: Most of the accounts receivable financing is usually structured as an asset sale. In this case, businesses sell accounts receivable to a factor in return for cash. The company receives capital in the form of cash assets. 
Loans: When businesses obtain the AR funds in the form of a loan, the AR books act as collateral to the loan. The factor will retain the AR books and have the duty to collect on those debts.

Pros and Cons of Accounts Receivable Financing


No Collateral Needed

Unlike other financing options, accounts receivables don’t require collateral in the form of guarantors and assets, making it favorable for small businesses.

Fast Cash

In account receivable financing, the factor avails fast cash by giving companies an advance on their invoices. This allows businesses to close the gap from when customers purchase to when they make payments. 

Entrepreneurs Retain Business Ownership

You don’t have to give out a share of your business to acquire finances through this method. Your AR books are the primary requirements.



You still have to take accountability for the non-paying clients in your business. Non-paying or late-paying clients can increase the amount owed to the factor, so you’ll have a more significant burden to bear.


In account receivable financing, the factoring company takes the receivable fees or charges interest on the advance. This is typically expensive since it’s monthly payments. 

Bottom Line

Small businesses need additional financing to support their daily operations. When these companies need quick cash, account receivable financing is an excellent option to help overcome these financial challenges. Contact Sterling Capital Consulting today to learn how our accounts receivable financing solutions can help your business.