For finance leaders across the US, one metric dominates every quarterly review - cash flow. Even profitable businesses can struggle when cash is trapped in unpaid invoices.
Delays in B2B invoice payments remain a structural challenge in the U.S. Many growth and mid-market firms report that a significant share of invoices are settled after the due date, contributing to stretched DSO. Working capital surveys increasingly cite that only a minority of invoices are settled early underscoring how late payments are a frequent stress point in AR cycles.
That’s why many finance leaders are rethinking how they manage their receivables. Beyond optimizing collection processes, some are turning to financial solutions that unlock cash tied up in invoices, without waiting for customers to pay. One approach gaining traction is Accounts Receivable (AR) Financing, a tool that helps businesses improve liquidity and maintain steady cash flow even when payments lag. Keep reading to find out:
Not sure where your AR process stands? Upflow’s free discover plan gives you instant insights into your collections process
What Is Accounts Receivable Financing?
Accounts receivable financing is a funding mechanism that allows businesses to unlock cash tied up in unpaid invoices. Rather than waiting for customers to pay, companies either sell or borrow against their receivables to access liquidity immediately. There are two main structures:
Factoring (Invoice Sales): Businesses sell their receivables to a financing company (factor) at a discount. The factor assumes collection responsibility and, depending on the arrangement, part or all of the credit risk. This model works well for businesses that want to offload the administrative burden of collections.
Invoice Discounting (Secured Lending): Businesses use receivables as collateral to secure a short-term loan or line of credit while retaining control of collections. This option appeals to companies that want to maintain direct customer relationships and have internal resources to manage collections.
Both models convert receivables into predictable cash flow, but they differ in operational impact and customer visibility.
Why Finance Leaders Are Turning to AR Financing
1. Improved Liquidity Without Equity Dilution
AR financing provides non-dilutive access to capital. Instead of selling shares or taking on long-term debt, businesses use their own receivables to finance growth or manage expenses. For venture-backed companies trying to extend runway between funding rounds, this preserves ownership. For bootstrapped businesses, it provides growth capital without surrendering control.
2. Faster Cash Conversion
The average US DSO (Days Sales Outstanding) rose to 52.6 days in 2024 (Hackett Group Working Capital Report). AR financing can cut this in half, turning what’s owed into working cash and thus improving liquidity ratios and supporting operational stability.
Consider the practical impact. A company with $5 million in outstanding receivables and a 60-day DSO has roughly $2.5 million tied up at any given time. Cutting DSO to 30 days through AR financing releases over $1 million in working capital that can fund payroll, inventory, marketing, or strategic hires. The velocity of cash becomes as important as the absolute amount.
3. Better Cash Flow Forecasting
Predictable cash inflows enhance financial modeling accuracy and enable better budget decisions, especially in uncertain markets.
4. Customer Retention Without Payment Friction
Done right, AR financing maintains not jeopardizes customer relationships. By integrating with Financial Relationship Management (FRM) platforms like Upflow, businesses can manage financing and collections without eroding trust or experience.
Aggressive factoring arrangements where third parties contact customers demanding immediate payment can damage relationships built over years. Modern AR financing embedded within FRM platforms operates invisibly from the customer perspective.
Market Overview: The State of Receivables Financing in the US
The Business Research Company estimates a global market size of $147.16 billion in 2024 growing to $164.06 billion in 2025 (CAGR ~11.5 %). In parallel, some studies forecast the market expanding toward USD 1.2 trillion-plus over the next decade.
These growth trajectories underscore that AR financing is not static and suggest that the U.S. market, as a major developed economy, likely sits in the tens to hundreds of billions in 2025, even if exact figures are elusive. Key trends shaping the market:
SME Adoption: Small and mid-sized firms are the fastest-growing adopters, accounting for over 60% of new factoring contracts.
Tech-Driven Risk Modeling: AI and data analytics enable more accurate invoice valuation and credit assessment.
Integration with ERP & AR Systems: Modern platforms are embedding AR financing directly into accounting tools, enabling real-time access to liquidity.
Shift Toward Relationship-Centric Models: Businesses are prioritizing solutions that align financing with customer experience, a space where Financial Relationship Management (FRM) is redefining norms.
How AR Financing Works: Key Mechanics
Accounts receivable (AR) financing converts future cash from invoices into immediate working capital. The key mechanics hinge on four variables that determine cost, cash flow impact, and risk sharing:
To see how these mechanics come together in practice, consider the following example.
Imagine NovaTech, a SaaS firm with $100,000 in outstanding invoices due in 60 days. To smooth cash flow, NovaTech partners with an AR financing provider under these terms:
Advance Rate: 85%
Discount Fee: 3% per month
Reserve / Holdback: 15%
Recourse: Recourse basis (NovaTech remains responsible if the customer defaults)
Step 1: Cash Advance: The financier advances $85,000 (85% of $100,000) immediately, providing liquidity to cover payroll and operations.
Step 2: Customer Payment: After 60 days, the customer pays the full $100,000 invoice directly to the financier.
Step 3: Settlement: The financier deducts the financing cost - in this case, $6,000 (3% × 2 months × $100,000) - and releases the remaining $9,000 from the holdback.
NovaTech ultimately receives $94,000, effectively paying $6,000 for two months of accelerated access to cash.
Together, these steps demonstrate how AR financing can:
Reduces NovaTech’s DSO from 60 days to 0 for that invoice.
Converts receivables into usable cash while preserving ownership (unlike equity funding).
Demonstrates how each lever: advance rate, fee, reserve, and recourse - shapes the true cost and liquidity impact.
AR Financing within Financial Relationship Management: The Next Evolution of Cash Flow Optimization
For too long, accounts receivable financing has been treated as a stand-alone tool, a quick liquidity fix when cash runs short. But modern finance leaders are realizing that cash flow isn’t a one-time problem to solve; it’s a system to optimize.
That’s why the future of AR financing lies within a broader discipline: Financial Relationship Management (FRM).
FRM is the foundation of a healthy cash ecosystem combining Accounts Receivable automation, Payments, and AR Financing into a single, data-driven platform that helps finance teams manage, predict, and accelerate cash flow with precision and empathy.
Rather than bolting financing onto existing workflows, FRM integrates it seamlessly into the financial relationship lifecycle from invoice sending to payment collection to liquidity optimization.
How FRM Transforms AR Financing
End-to-End Visibility
FRM centralizes every element of cash flow: invoices, payments, and financing options in one unified dashboard. Finance teams can monitor working capital health and take action in real time.
Integrated Payments Experience
With Payments by Upflow, businesses make it easier for customers to pay, reducing DSO before financing is even required. Financing then becomes a strategic lever, not a lifeline.
Relationship-Centric by Design
Traditional AR financing solutions treat customers as debtors. FRM treats them as partners. Every action whether payment reminder, financing decision, or follow-up, is relationship-sensitive, ensuring long-term trust and retention.
The Strategic Shift
Financial Relationship Management reframes how companies think about liquidity:
AR automation drives accuracy. Payments by Upflow accelerates collection. AR financing unlocks flexibility. FRM brings it all together to create sustainable cash flow.
In this paradigm, Upflow isn’t just another AR tool, it’s the operating system for cash flow optimization.
Short-term liquidity needs get met through financing. Medium-term cash flow improves through payment optimization. Long-term financial health strengthens through relationship management that preserves and grows customer value.
Finance leaders using Upflow’s FRM solution gain a real-time view of receivables, payments, and financing levers, enabling them to make smarter, faster, and more relationship-aligned cash decisions.
The result is a finance function that moves from reactive to proactive, from transactional to strategic, and from cash-constrained to cash-confident.
FAQs
Q: How does AR financing compare to traditional bank loans or equity funding?
A: AR financing offers distinct advantages over traditional funding sources. Unlike bank loans, it doesn't require extensive collateral or lengthy approval processes, and it grows with your sales - the more invoices you generate, the more financing is available. Compared to equity funding, AR financing is non-dilutive, meaning you don't surrender ownership or control of your company. It's also faster to access and doesn't impact your cap table.
Q: What's the difference between factoring and invoice discounting?
A: Factoring involves selling your invoices to a third-party financing company (factor) at a discount. The factor takes over collection responsibility and may assume the credit risk. Invoice discounting, on the other hand, uses your receivables as collateral for a loan or line of credit while you retain control of collections and maintain direct customer relationships. Factoring is ideal if you want to offload administrative burden, while discounting works better when you prefer to manage customer interactions yourself.
Q: How much does AR financing typically cost?
A: AR financing costs typically range from 1-5% per month, depending on factors like your industry, invoice quality, customer creditworthiness, and the financing structure. For example, if you finance a $100,000 invoice for two months at 3% monthly, you'd pay $6,000 in fees. The actual cost also depends on the advance rate (usually 70-90% of invoice value) and whether it's a recourse or non-recourse arrangement.
Q: What's the difference between recourse and non-recourse AR financing?
A: In recourse financing, you remain responsible if your customer defaults on payment - you must buy back the invoice or repay the advance. Non-recourse financing transfers the credit risk to the financing provider, meaning they absorb the loss if your customer doesn't pay. Non-recourse arrangements typically cost more due to the additional risk the financier assumes, but they provide greater protection for your business.
Q: Will AR financing damage my customer relationships?
A: Not if done correctly. Modern AR financing integrated within Financial Relationship Management (FRM) platforms operates invisibly from the customer's perspective. Traditional aggressive factoring where third parties demand immediate payment can harm relationships, but contemporary solutions maintain your existing customer interactions.
Q: Is AR financing only for struggling businesses?
A: Absolutely not. While AR financing helps companies facing cash crunches, it's increasingly used strategically by growth-oriented businesses. Venture-backed companies use it to extend runway between funding rounds without equity dilution. Profitable firms leverage it to fund expansion, inventory, or strategic hires without taking on long-term debt.
Q: Can small and mid-sized businesses access AR financing?
A: Yes, and they're the fastest-growing adopters. Small and mid-sized firms now account for over 60% of new factoring contracts. Tech-driven solutions and integration with ERP and AR systems have democratized access, allowing SMEs to compete more effectively by optimizing their working capital.