Accounts receivable financing

How it works

Receivables financing commonly provides credit secured by qualifying invoices. The lender uses an advance rate against eligible receivables to determine availability. Invoices can become ineligible because of age, disputes, concentration, or other agreement rules.

Where it can fit

A business with reliable commercial customers may have valuable invoices but insufficient cash until customers pay. Receivables finance connects borrowing capacity to that operating cycle. It is distinct from simply taking a term loan based on annual revenue.

Look closely at the trade-offs

An invoice balance in the accounting system is not the same as an eligible borrowing base. A large late customer can reduce availability exactly when cash becomes tight. Confirm lockbox arrangements, reporting frequency, audit rights, and how collections reduce debt.

Turn the invoice ledger into a cash decision

Start with a dated receivables aging, then label each adjustment separately. A customer dispute, an old invoice and a credit note are different problems even when each reduces availability. Keep the original ledger total visible so your lender can reconcile the report without guessing which records disappeared. Ask for a worked calculation using your own customer mix before comparing advance percentages.

Source: OCC: Accounts Receivable and Inventory Financing

Worked example: why a larger ledger can still leave a gap

A fictional wholesaler reports $240,000 of invoices. Assume its agreement excludes $30,000 of overdue invoices and $10,000 of disputed invoices, leaving $200,000 eligible. At an invented 80% advance rate, the borrowing base is $160,000. With $115,000 already drawn and a separate $5,000 reserve, additional availability is $40,000. This simplified example assumes the facility limit is higher than the calculated base and there are no other restrictions.

Now suppose a $25,000 eligible invoice crosses the agreement’s aging limit before the customer pays. With everything else unchanged, the base falls by $20,000 and headroom falls to $20,000. The business has not spent more money; its collateral eligibility changed. If next week’s supplier payment is $35,000, it needs to collect cash, resolve the dispute or arrange another agreed funding source. A larger headline credit limit would not fix this particular borrowing-base shortage.

Prepare for the weekly conversation

Put expected customer collections next to supplier and payroll dates. Ask who receives the payments and how quickly cleared collections reduce the balance or restore availability. Test the effect of your largest customer paying late, issuing a return or requesting a credit. Those scenarios connect the credit agreement to normal sales operations.

Receivables financing and factoring can produce different customer communications and legal arrangements. Compare the proposed documents rather than assuming every invoice product works the same way. The OCC handbook explains borrowing-base controls in a U.S. bank-supervision context; individual Canadian and U.S. agreements still govern eligibility and remedies.

Build a customer-risk worksheet with five columns: invoice amount, due date, expected receipt date, eligibility status and the reason for any exclusion. Update it alongside your cash forecast. If a customer is late but the invoice is still eligible, do not silently move the expected receipt date without explaining why. A short note about the collection conversation can be more useful than presenting a precise date that has no support.

• Which invoices are excluded today, and which could become ineligible next month?
• Are customer concentration limits applied before or after the advance rate?
• What reserves, fees and facility caps reduce the cash available?
• What report is due, who signs it, and what happens if availability becomes negative?

Your next-step checklist

• Detailed receivables aging
• Customer and invoice eligibility
• Existing liens on receivables
• Weekly or monthly reporting capability