Which Clients Qualify for AR-Based Financing? An Accountant’s Guide
Your client is profitable. Sales are growing, and the next big order is already in. But when you look at the cash flow forecast, there’s a problem.
The company needs to cover payroll, pay vendors, and keep operations running now. Meanwhile, customers may have another 30, 60, or even 90 days to pay their invoices. That timing gap can get wider as the business grows. More orders can mean more cash going out before more cash comes in.
For some businesses, AR-based financing can help bridge the gap by borrowing against eligible accounts receivable. And as an accountant or fractional CFO, knowing what to look for in your clients' financials can help you recognize when this type of financing may be worth exploring.
Which Clients Qualify for AR-Based Financing?
Start with the basics. AR-based financing is generally designed for established B2B businesses that generate receivables from completed work or delivered goods and need access to cash before their customers pay.
For Aion, some initial indicators include at least 12 months in business, $75,000 in eligible accounts receivable, and average annual revenue of at least $500,000. Exceptions may apply, and meeting these benchmarks does not guarantee approval.
If a client clears that initial screen, the more interesting questions are already sitting in the financials you review.
Is the cash crunch really a timing problem?
A growing client can have a healthy business and still run short of working capital. Consider a company that pays payroll, inventory, contractors, and other operating costs before it can invoice its customer. Even after the product ships or services are completed, the customer may have weeks to pay. The business has made the sale, but the cash from that sale isn’t available to fund the next one yet.
That’s an important distinction to make when reviewing the numbers. Look at gross margins alongside the cash flow forecast. If the underlying work is profitable but cash gets tight between paying expenses and collecting customer invoices, AR financing may help address a timing mismatch.
If the company is consistently losing money and would still face a shortfall after its customers pay, borrowing may not solve the underlying problem. Pricing, costs, debt, or other operating issues may need attention as well.
The question is: Would collecting these receivables relieve the cash pressure, or is the business short of cash regardless of when customers pay?
H3: How much of the AR is likely to turn into cash?
A large AR balance can catch your attention, but the total number only tells part of the story. Suppose two businesses each report $500,000 in accounts receivable. One has a consistent history of customers paying according to terms. The other has a growing number of overdue invoices, disputes, and deductions.
Those are very different financing situations.
Start with the AR aging report and recent collection history. Look at whether invoices relate to goods that have been delivered or services that have been completed, whether customers generally pay as agreed, and whether any balances are disputed.
Days sales outstanding (DSO) and AR turnover can help you spot changes in collection patterns, too. A rising DSO isn't automatically a problem. A major customer may simply have negotiated longer terms. But if DSO is rising because invoices are being disputed or customers are increasingly paying late, that deserves a closer look.
Aion typically considers receivables up to 90 days old, but age alone does not determine whether an invoice is eligible. Payment history, disputes, and other factors can also affect the amount of AR that can support a line of credit. In other words, don't just ask how much AR the client has. Ask how good that AR is.
Who owes the money?
The next place to look is the customer list. A business with dependable commercial customers that consistently pay their invoices presents a different picture from one whose receivables depend heavily on customers with erratic payment histories.
Review deductions, credits, write-offs, and unresolved disputes. If customers routinely pay less than the invoiced amount because of returns, damaged products, or other issues, the balance sheet may overstate the amount the company can realistically expect to collect.
Customer concentration matters as well. Aion gives additional scrutiny to debtors representing 10% or more of a company's revenue. That does not mean a concentrated customer base automatically disqualifies a business. It means the lender will want to understand that relationship and the customer's payment history.
For an accountant, concentration can be a useful prompt: If this customer paid late, what would happen to the business's cash position?
Do the numbers tell a consistent story?
No single ratio or report will tell you whether a client is a good candidate for AR-based financing. Look for a pattern across the financials.
Look at several months of activity rather than relying on one snapshot. Many businesses can be seasonal, and one unusually large shipment or customer payment can distort a single month's numbers.
The goal isn't to check every box. It's to understand the story the numbers are telling.
When Might AR-Based Financing Make More Sense Than a Term Loan?
The purpose of the financing matters. If a business needs to purchase equipment, or make another significant long-term investment, a term loan may be worth considering because the repayment period can correspond with the useful life of the asset.
A recurring working capital gap is different. If the company regularly needs cash to cover payroll, inventory, vendors, or other operating expenses while it waits for customers to pay, a revolving line backed by receivables may be a better fit for that use case. As invoices are paid and the company pays down what it has borrowed, availability can open back up for future needs.
That can be particularly relevant when growth itself is creating the cash squeeze. The company isn't necessarily looking to finance one large purchase. It needs working capital that can support an ongoing cycle of delivering products or services, invoicing customers, collecting payments, and funding the next round of business.
Help Your Client Recognize the Opportunity
One advantage you have as an accountant or fractional CFO is that you don't need to wait for your client to ask about AR-based financing.
You can see the receivables. You know which customers pay reliably. You can see whether margins are holding up and whether the cash flow forecast gets tighter every time sales increase.
When those pieces line up, the conversation can be straightforward: Your business is profitable, but a lot of your cash is sitting in receivables while you're covering day-to-day expenses. It may be worth looking at whether those receivables could support a line of credit.
From there, the lender can determine which receivables are eligible, how much borrowing capacity they may support, and whether the financing is appropriate for the business. Aion offers revolving lines of credit up to $5 million, giving growing businesses access to financing that can scale with their needs.
If you have a client whose growth is putting more pressure on working capital, learn more about Aion's receivables-backed revolving line of credit or introduce your client to Aion to explore whether it could be a fit.