Accounts receivable financing is a credit facility secured by a borrower's AR. Asset-based lending (ABL) advances typically 80-90 percent of eligible receivables at 7-12 percent APR, with covenants and a borrowing base. Factoring is a sale at a discount, effective APR 12-25 percent. ABL is cheaper but more operationally demanding.
Accounts receivable financing is a working-capital instrument in which a lender extends credit secured by the borrower's accounts receivable. It is not the same as factoring. Factoring sells the receivable at a discount; AR financing lends against the receivable as collateral, with the borrower retaining collection and the receivable on its balance sheet. The distinction is consequential for cost, control, and balance-sheet treatment.
For a B2B exporter with a predictable receivables ledger and a competent credit control function, AR financing is usually the cheaper option. For a business without internal collection capacity, or with concentrated debtor risk, factoring competes on convenience even at higher cost.
DimensionAsset-Based Lending (ABL)FactoringAdvance rate80-90% of eligible AR70-90%Cost structureInterest on drawn balance + unused-line feeDiscount fee per 30-day periodEffective APR7-12% all-in12-25% all-inCollection responsibilityBorrower keepsFactor (usually)Balance sheet treatmentAR remains, loan addedAR derecognized (non-recourse)CovenantsFinancial + operationalMinimal beyond factoring qualityTypical minimum facility$500k - $5M$100k - $2M
An ABL lender establishes a borrowing base: the calculated maximum advance available to the borrower based on eligible receivables. The borrowing base is recalculated monthly from reported aging data.
Typical borrowing base formula:
Eligible AR × Advance Rate - Reserves - Dilution = Borrowing Base
Where:- Eligible AR excludes receivables past a defined age (often 90 days), concentrations above a threshold, related-party balances, and disputed items- Advance rate is typically 80-90 percent of eligible AR, set at facility origination- Reserves are carve-outs for specific risks (a particular customer, seasonal concentration, etc.)- Dilution is the historical credit-note rate — the percentage of receivables that return as credits rather than cash
A borrower with $10 million of total AR, 80 percent eligible after ageing and concentration filters, at an 85 percent advance rate with 5 percent dilution reserve, has a borrowing base of roughly $6.5 million.
The borrower draws and repays against the facility like a revolving line of credit. Interest is charged on the outstanding balance only. An unused-line fee (typically 0.25-0.50 percent annualized) applies to the undrawn portion.
The eligibility rules matter as much as the advance rate. A generous 90 percent advance rate against a tight eligibility definition produces less cash than an 80 percent rate against a broader definition.
Common eligibility exclusions:
An ABL facility that works well for one business may barely advance on another with the same topline AR, if the eligibility profile differs materially.
A worked example clarifies the ABL-vs-factoring cost question.
Scenario: A B2B exporter with $12M annual receivables, 45-day average DSO, needing working capital for growth.
Option A: ABL facility. 85 percent advance on eligible AR. Interest rate: SOFR + 3.5% (approximately 8.25% at current SOFR). Unused-line fee: 0.40%. Facility limit: $5M.
Average outstanding balance under normal operations: $3.5M drawn. Interest cost: $3.5M × 8.25% = $288,750 annual. Unused-line fee: $1.5M × 0.40% = $6,000. Monthly admin: negligible. Total annual financing cost: approximately $295,000.
Option B: Whole-ledger factoring. 85 percent advance, 1.8% discount per 30-day period.
Average AR factored: $1.5M monthly turnover × 45-day average = $2.25M average advanced. Monthly discount cost: $1.5M × 1.8% × (45/30) = $40,500. Annual: $486,000.
ABL is $191,000 per year cheaper at this scenario. The break-even point where factoring becomes competitive on cost is when the discount rate drops below about 1.0% per 30 days, which requires strong debtor quality and a large whole-ledger commitment.
ABL facilities come with financial and operational covenants. Factoring usually does not.
Common ABL covenants:
The covenants are not onerous for a well-run business, but they shift decision authority. A borrower who wants to release cash to shareholders or make a non-ordinary-course payment needs lender consent under most ABL facilities.
For a business that values operational simplicity over the cost savings, factoring's lack of covenants becomes an argument in its favor.
Three scenarios where ABL financing outperforms alternatives:
Stable growth with adequate credit metrics. An exporter growing receivables at 15-25 percent annually, with fixed-charge coverage above 1.2x, is a natural ABL borrower. The facility scales with the AR book; the interest cost is manageable; the covenants are achievable.
Investment-grade debtor base. Where most receivables are against well-rated debtors, eligibility exclusions are minimal, and the borrowing base runs close to total AR. ABL economics become very favorable.
Existing bank relationship. An ABL facility is usually extended by the business's primary commercial bank. The integration with existing treasury services, merchant acquiring, and operating accounts reduces administrative friction relative to engaging a factoring firm.
Three scenarios where AR financing is a poor fit:
Very thin margins. At net margins below 8 percent, even low-cost financing is material. Equity or retained earnings is often cheaper.
Concentrated debtor exposure. If 40+ percent of AR is with one debtor, concentration reserves effectively defeat the facility. Credit insurance or non-recourse factoring are better tools.
Very small facilities. ABL minimums of $500k-$1M put the instrument out of reach for genuinely small businesses. Factoring or invoice discounting reach down to lower thresholds.
In review of ABL facilities over the past 18 months, the single most underrated cost element was the ineligible-AR gap.
For a borrower with $10M of AR, an 85 percent advance on 75 percent-eligible AR produces $6.4M of availability. The same borrower might be counting on $8.5M of theoretical advance ($10M × 85%). The $2M gap is the ineligible-AR cost — the receivables that exist on the balance sheet but do not fund anything.
That gap has economic weight. If the borrower actually needs $7M of working capital, the ABL cannot provide it; the borrower runs short or seeks additional financing at higher marginal cost. The lender's advance rate in the facility term sheet looks generous; the effective advance against total AR is often 60-70 percent, not 85.
The operational response is pre-negotiation diligence: map the expected eligibility profile before signing the term sheet. A 90 percent advance rate on a 50 percent-eligible book is materially worse than an 80 percent rate on an 80 percent-eligible book. Compare advance rate times eligibility rate, not advance rate alone.
A credit facility in which a lender advances funds against the borrower's accounts receivable as collateral. The facility typically allows the borrower to draw up to 80-90 percent of eligible AR on a revolving basis, paying interest on the drawn balance. The AR stays on the borrower's balance sheet; the lender has a perfected security interest through a UCC-1 filing.
AR financing is a loan with the AR as collateral; factoring is a sale of the AR at a discount. In AR financing, the borrower retains collection responsibility and the AR remains an asset. In factoring, the factor typically takes over collection and, under non-recourse terms, accepts default risk. AR financing is cheaper but more operationally demanding.
Effective APR typically runs 7-12 percent all-in, including interest and unused-line fees. The headline rate is usually SOFR or prime plus a margin of 2-5 percent. Monthly admin and audit costs add a small incremental expense. Compared to factoring (12-25 percent effective APR), AR financing is materially cheaper but requires stronger borrower credit quality and more administration.
The calculated maximum advance available under an AR facility, derived from eligible receivables after applying the advance rate and subtracting reserves and dilution. Submitted monthly by the borrower on a borrowing base certificate. The facility availability varies month-to-month with the underlying AR.
Receivables that qualify for the borrowing base calculation. Typical exclusions include receivables past 90 days, concentrations above a customer-limit threshold, related-party or intercompany balances, disputed items, and sometimes international or foreign-currency receivables. Eligibility rules are negotiated at facility origination and matter as much as the advance rate.
A chargeback from an ABL facility on a defaulted receivable is a recovery case with a compressed timeline. Place a case for assessment within one business day.
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