Accounts Receivable Financing Best Practices

Accounts receivable financing can make or break a business. This may seem like an exaggeration, but consider this scenario: You run a well-established company in the UK with smooth logistics and strong year-end projections. Suddenly, your biggest customer declares bankruptcy, leaving unpaid invoices behind. The financial hit could be devastating, potentially disrupting your cash flow and operations.

This is where accounts receivable financing steps in. A solid grip on accounts receivable financing ensures a steady revenue stream and a healthy cash flow. It brings timely payments and also fosters solid client relationships, ensuring a business maintains high liquidity.

If you're a UK business with all logistics in place but still face a tough time handling unpaid invoices, you should read this guide. It explores the fundamentals of implementing accounts receivable financing best practices for you to get started.

As you reflect on receiving payments from your international clients, we’ll also touch on Wise Business, a cost-effective way to send business payments and receive money from abroad in multiple currencies, with conversions using the mid-market exchange rate.

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What is Accounts Receivable Financing?

Accounts receivable financing involves selling them. In simpler terms, a business sells its outstanding invoices to a finance company. This is a reliable option for companies that instantly need capital. It helps them receive funding according to a certain percentage of their accounts receivable.

The process helps a business acquire working capital without taking out traditional debt. Also, there are different ways to proceed with an accounts receivable agreement. You can structure it as an asset or a loan. Regardless of its structure, the core idea is to get your hands on working capital immediately so the business operations can go as smoothly as possible.

Financing accounts receivable is particularly vital for small to medium enterprises (SMBs). According to a report, SMBs spend an average of 4 weekly hours chasing late payments, which totals 8.5 days a month¹. Figures like this reinstate the importance of having an upper hand on accounts receivable financing, whether you're a big shot in the corporate world or a business just starting out.

Benefits of Financing Accounts Receivable

The AR financing process helps a business utilize their unpaid invoices as collateral. Listed below are several benefits of the process:

Instantly Improves Cash Flow

Waiting for customers to pay their invoices can slow down your business. With accounts receivable funding, you can turn unpaid invoices into immediate cash. This way, you can have the funds to cover payroll, restock inventory, or seize new business opportunities without delays.

Doesn't Add to Your Debt Load

Unlike traditional loans, accounts receivable loans don't appear as debt on your balance sheet. This means your credit rating remains unaffected, allowing you to access future funding when needed.

Alternative to Bank Loans

AR funding offers a practical solution if your business struggles to secure traditional financing due to a limited credit history or lack of collateral. Since approvals are based on your client's creditworthiness, not yours, it's easier to qualify for than a bank loan.

Quick and Easy Approval

In contrast to lengthy loan applications, accounts receivable funding comes with a simpler process. You can often get approved and receive funds within days, making it a viable option for businesses that need fast working capital.

Repay on Your Terms

Many AR financing providers offer repayment structures that align with your cash flow, so you're not burdened with rigid monthly payments. This flexibility helps keep your business financially stable.

With steady cash flow from accounts receivable, you can reinvest in your business, whether launching a new product, expanding your team, or entering new markets. AR funding eliminates cash flow bottlenecks, giving you the freedom to grow.

Best Practices for Accounts Receivable Funding

Your business needs a strategic approach to make the most from accounts receivable funding. Here are some key practices to maintain a stable financial status:

Look for Reputable Financing Partners

Not all AR funding providers are the same. Do your homework and explore all the options. Compare the existing offers and pick a lender you can trust. Look for clear pricing, flexible repayment plans, and a solid track record in the industry.

Keep Clear, Organized Invoices

Lenders review your invoices before approving funds, so make sure they're updated and well-kept. Track them properly, avoid errors, and include clear payment terms and due dates to make collection easier.

Check the Customer's Creditworthiness

AR funding depends on your customers' payments. Working with trustworthy clients lowers the risk. Run credit checks and set clear payment terms to avoid late or missed payments.

Refine Your Payment Collection System

Unpaid invoices are a nuisance, even if you outsource them to financial institutes. Remind your finance teams to speed up payments. Offering discounts and invoices is one way to make that happen. You can also automate invoices and reminders to make collections easier and keep unpaid balances low.

Watch the Fees and Interest Rates

Lenders charge different rates and fees for AR financing. Evaluate the full cost, including hidden fees, so you don't lose profits.

At the end of the day, as a business, you need to know that AR loans can boost cash flow, but they shouldn't be the sole solution. Use them wisely as part of a larger financial strategy, not a long-term fix.

Instead, search for the best practices for chasing payments so your business has a steady cash flow. Grant Thornton reports that UK-based companies have over £125 billion locked in working capital, which could be freed up with better cash flow management². Therefore, working on the basic issue is essential instead of repeatedly opting for financing accounts receivable.

Example of Accounts Receivable Financing

The Situation

Swift Supplies Ltd., a mid-sized wholesale distributor in the UK, sells products to retailers with a 60-day payment window. Business is going well, but waiting for payments creates cash flow issues. This makes it harder to pay suppliers on time, restock inventory, and invest in growth.

The Solution

Swift Supplies works with an accounts receivable funding provider to keep things running smoothly. They sell £200,000 worth of unpaid invoices for quick cash. Once the customers pay, the lender gives them 85% upfront and the rest (minus fees).

The Impact

Swift Supplies no longer has to wait 60 days for payments, which allows it to manage daily expenses without cash flow worries. Paying suppliers faster helps them secure bulk discounts and build stronger relationships. With steady working capital, the company can invest in new products and expand into new markets. It does not entirely rely on expensive loans and uses its own receivables to fund growth, keeping debt under control.

Difference Between Accounts Receivable Financing and Factoring

A primary difference between accounts receivable financing and funding is who owns the invoices and collects the payments. In accounts receivable financing, the business keeps control of the invoices and is responsible for collecting customer payments. In factoring, the invoices are sold to a third party (the factor), and customers pay them directly instead of the business.

The following table breaks it down:

Feature	Accounts Receivable Financing	Accounts Receivable Factoring
Invoice Ownership	Business keeps the invoices	Invoices are sold to a third party
Payment Collection	Business collects payments	Third-party collects payments
Customer Interaction	Customers pay the business	Customers pay the third-party
Use of Funds	Loan secured by invoices	Invoices are sold for immediate cash
Risk Handling	Business is responsible for unpaid invoices	Third-party may take on the risk (varies)

Despite the lucrative benefits that tag along with the sale of accounts receivable, it’s important to look at the other side of the coin. For instance, the cost of AR financing can be higher than traditional loans, which makes them an expensive option.

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FAQs - Accounts Receivable Financing

Here are some of the most commonly asked questions about accounts receivable financing:

Can you lend against accounts receivable?

Yes, some lenders provide accounts receivable financing. They use unpaid invoices as collateral to offer upfront cash.

What is the agreement of accounts receivable financing?

An accounts receivable financing agreement is a contract between a business and a lender. It details the terms of the funding arrangement. The agreement states how much money the company will receive and which invoices serve as security. It also covers repayment terms, interest rates, and the responsibilities of both parties.

Why is accounts receivable financing a major concern for companies?

The accounts receivable (AR) department is vital to a company's financial stability. Its main job is to make sure the business collects payments for its products or services. Even strong sales can lead to lost revenue without an efficient AR team.

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Sources used:

1. 27 Accounts Receivable Statistics for 2025
2. UK companies have over £125bn of excess cash tied up in working capital

Sources last checked on date: 04-Jun-2025