In today’s dynamic business environment, maintaining a healthy cash flow is crucial for success. However, it’s not uncommon for businesses to experience temporary gaps between selling products or services and receiving payment from customers. This is where an accounts receivable line of credit comes in.

This guide dives deep into accounts receivable line of credit financing, also known as a line of credit based on accounts receivable or a line of credit secured by accounts receivable. We’ll explore how it works, its benefits, eligibility requirements, and the key factors to consider before applying.

What is an Accounts Receivable Line of Credit?

An accounts receivable (AR) line of credit is a type of financing option specifically designed for businesses with outstanding invoices. It allows businesses to borrow money against the value of their unpaid customer invoices. This essentially bridges the gap between selling on credit and receiving payment, ensuring a smoother cash flow.

How Does an Accounts Receivable Line of Credit Work?

Here’s a breakdown of the typical process for obtaining and utilizing an accounts receivable line of credit:

  1. Application and Approval: The business applies for an AR line of credit with a lender, such as a bank or a specialized financing company. The lender will evaluate the company’s creditworthiness, the quality of its customer base, and the value of its outstanding invoices.
  2. Credit Limit Establishment: Based on the assessment, the lender establishes a credit limit for the accounts receivable line of credit. This limit typically represents a percentage (often up to 80%) of the value of the business’s eligible accounts receivable.
  3. Invoice Submission: Once approved, the business submits invoices to the lender for approval. The lender will assess the creditworthiness of the customers listed on the invoices.
  4. Advance on Approved Invoices: Upon approval of the invoices, the lender advances a percentage of the invoice value (usually between 70% and 90%) to the business. This provides immediate access to cash.
  5. Customer Payment and Line Repayment: When the customer pays the invoice, the business collects the full amount. A portion of this payment goes towards repaying the advance received from the lender, along with any associated fees. The remaining amount represents the business’s earned revenue.
  6. Revolving Line of Credit: An AR line of credit functions as a revolving line of credit. As the business collects payments on outstanding invoices and repays the lender, the available credit limit is replenished. This allows the business to continue drawing funds against new approved invoices.

Benefits of an Accounts Receivable Line of Credit

Offers several advantages for businesses, including:

  • Improved Cash Flow: By providing immediate access to cash against outstanding invoices, an AR line of credit helps businesses bridge cash flow gaps and maintain smooth operations.
  • Increased Working Capital: The additional capital obtained through an AR line of credit allows businesses to invest in inventory, marketing initiatives, or other growth opportunities without waiting for customer payments.
  • Flexible Access to Funds: The revolving nature of an AR line of credit provides businesses with the flexibility to draw on funds as needed, only paying interest on the utilized amount.
  • Simplified Management: Compared to invoice factoring, where the ownership of the invoices is transferred, an AR line of credit allows businesses to retain control over their customer relationships and collection process.

Eligibility for an Accounts Receivable Line of Credit

The eligibility requirements for an accounts receivable line of credit can vary depending on the lender. However, some general factors lenders consider include:

  • Business Age and Stability: Lenders generally prefer businesses with a proven track record of profitability and a stable customer base.
  • Creditworthiness: The overall financial health of the business, including its credit score and debt-to-equity ratio, will be evaluated.
  • Quality of Accounts Receivable: The creditworthiness of the business’s customers and the average collection period for invoices are crucial factors.
  • Industry: Certain industries with faster customer payment cycles may be more favorable for obtaining an AR line of credit.

Key Considerations Before Applying for an Accounts Receivable Line of Credit

While offers significant benefits, it’s essential to consider these factors before applying:

  • Interest Rates and Fees: AR lines of credit typically have higher interest rates compared to traditional business loans. Be sure to compare rates and fees from different lenders before making a decision.

Impact on Customer Relationships:

Ensure clear communication with customers about the use of an AR line of credit to avoid any potential misunderstandings. Some lenders may offer options for discreet notification to customers.

  • Alternatives to Consider: Explore other financing options like business loans, lines of credit secured by assets, or invoice factoring before finalizing an AR line of credit.

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Choosing the Right Accounts Receivable Line of Credit Provider

With numerous lenders offering accounts receivable line of credit options, careful evaluation is crucial. Here are some key factors to consider when selecting a provider:

  • Interest Rates and Fees: Compare the interest rates and associated fees (origination fees, maintenance fees, etc.) offered by different lenders.
  • Advance Rate: The percentage of the invoice value advanced by the lender can vary. Choose a provider offering an advance rate that meets your business needs.
  • Approval Speed and Flexibility: Consider the lender’s approval process turnaround time and their flexibility in terms of credit limits and eligibility requirements.
  • Customer Service: Select a lender with a reputation for excellent customer service to ensure a smooth and supportive experience.


An accounts receivable line of credit can be a valuable tool for businesses facing temporary cash flow gaps due to outstanding invoices. By understanding how it works, its benefits and drawbacks, and the key considerations involved, businesses can make informed decisions about utilizing this financing option for their specific needs.

Additional Resources:

  • Small Business Administration (SBA): The SBA website provides valuable resources on financing options for small businesses, including information on accounts receivable lines of credit:
  • National Association of Business Brokers (NABB): The NABB offers educational resources on various financing options, including accounts receivable lines of credit:

Remember: Consulting with a financial advisor experienced in small business financing can be highly beneficial when deciding if an accounts receivable line of credit is the right choice for your business.

By Hamida

Meet Hamida, a dynamic writer with a passion for unraveling the complexities of finance across the globe. Armed with a keen intellect and a love for exploring economic landscapes, Hamida delves into the intricate world of finance, deciphering its intricacies and translating them into accessible insights for her readers.