Accounts Receivable Financing: Borrowing Base Lines, Advance Rates and Costs

Accounts receivable financing vs invoice factoring

Both turn unpaid invoices into cash, and both are governed by Article 9 of the Uniform Commercial Code, which covers security interests and sales of accounts alike. The legal and practical difference is ownership. In factoring, the factor buys the invoice, notifies your customer and is paid directly. In receivables financing, you pledge the invoices as collateral for a loan and borrow against them; the lender’s claim is a lien, and your customer’s obligation is still to you.

That difference shows up in daily operations. Under UCC § 9-406, a customer may keep paying you until it receives a notice that the account has been assigned, so receivables lenders usually do not notify customers. Instead, payments are often routed to a lockbox or a collateral account the lender monitors. You run your own credit decisions and collections, and the loan balance goes down as customers pay. With factoring the factor runs collections on the invoices it bought.

How the borrowing base works

The borrowing base is the ceiling on what you can owe at any moment. You start with gross receivables from the aging report, subtract the invoices the agreement treats as ineligible, apply any concentration limit, and multiply the eligible total by the advance rate. Availability is that figure minus the loan balance and any reserves. When you invoice, the base rises; when customers pay, collections pay down the loan and free availability again.

The OCC’s handbook for bank examiners describes advance rates of 70 to 85 percent of eligible receivables as common, with some banks going up to 90 percent on business-to-business accounts, and notes that the effective rate is often lower once dilution and minimum reserves are subtracted. Dilution means credits that reduce what customers actually pay, such as returns, allowances and disputes; the same handbook says it is usually expected to be 5 percent or less. Higher dilution usually means a lower advance rate.

Eligible and ineligible receivables

To count, a receivable generally has to come from a completed sale in the ordinary course of business and be subject to the lender’s perfected first-priority security interest. That rules out invoices already pledged to someone else, so an existing blanket lien from a merchant cash advance or online loan often has to be paid off or subordinated before a receivables line can close.

The categories below are the ones the OCC lists as commonly ineligible. The aging cutoff is usually expressed against invoice terms: an account past due by three times the terms, such as 90 days on 30-day terms, normally drops out. Many agreements also cross-age a customer, excluding every invoice from that customer once a set share of its balance goes past the cutoff. Concentration limits cap how much of the base any one customer can represent; the OCC suggests 10 to 20 percent of the base when a borrower’s customers are concentrated.

• Past due beyond the cutoff, typically more than 90 days from invoice on 30-day terms
• The portion of one customer’s balance above the concentration limit
• Contra accounts, where you also buy from the customer and it can net what it owes
• Receivables from affiliates or related companies
• Federal government receivables, which need Assignment of Claims Act steps before a lender can rely on them
• Foreign receivables without credit insurance or a letter of credit
• Re-aged invoices, invoices owed by insolvent customers, and unbilled work
• Progress billings, retainage and bill-and-hold invoices in many agreements

Worked example: a borrowing base on $186,000 of receivables

Hypothetical. A commercial electrical supplier has $186,000 of open invoices on 30-day terms. The agreement excludes invoices more than 90 days from invoice date, contra accounts and a federal agency account, caps any single customer at 20 percent of eligible receivables, and advances 80 percent. Illustrative only, not an offer.

After exclusions, $157,600 remains. The largest customer owes $44,100, which is $12,580 above the 20 percent cap of $31,520, so eligible receivables are $145,020 and the borrowing base is about $116,000. If the company draws an average of $98,500 for a month at an assumed 11.5 percent annual rate, the interest is about $931 for 30 days, before any monitoring fee. Collecting the over-90 invoices or adding another large customer would raise availability without a new application.

What receivables financing costs

Interest is charged only on the drawn balance, usually at a variable rate above an index. As of 2026, published ranges for business lines of credit run from about 10 percent at the bank end to 60 percent for short online lines; receivables-secured lines from banks and asset-based lenders generally price toward the lower part of that range because the collateral is liquid. The examiners’ handbook is frank that asset-based loans often cost more than other commercial loans, with higher fees and reporting costs, while noting they may still be the most economical financing available to the borrower.

The fees around the interest rate are where offers differ most. Ask for every one in writing: origination or commitment fee, unused-line fee on the undrawn commitment, monthly collateral monitoring fee, field exam charges, lockbox and wire fees, minimum interest or minimum usage, and early termination fees. The OCC notes that charges for field audits, lockboxes and appraisals are typically passed to the borrower. Compare offers on total annual cost at your expected average draw, not on the headline rate.

Reporting, field exams and cash control

Plan for three routines. First, a borrowing base certificate, usually weekly or monthly, with the receivables aging and a sales and collections roll-forward. Second, field exams: the lender or an outside examiner visits before closing and periodically afterwards, often quarterly and more often if risk warrants, to test invoices, verify balances with customers, review credit memos and check your accounting system. Third, cash control through a lockbox, either full dominion, where collections pay the loan daily, or springing dominion, which applies only if availability drops below a set level.

Clean books make all three cheaper and faster. Lenders want an aging that ties to the general ledger, invoices backed by proof of delivery or signed work orders, credit memos issued promptly, and no habit of re-dating old invoices. Businesses that already close their books monthly tend to find the reporting manageable; those that do not usually need to fix that first.

Which businesses fit a receivables line

It suits B2B companies with recurring invoices on 30 to 60-day terms, a spread of creditworthy customers, and enough history and financial reporting for a lender to underwrite the business itself: distributors, manufacturers, staffing firms, wholesale food suppliers, IT and engineering services, and commercial contractors billing on completion. A receivables line is usually cheaper than factoring for those businesses because interest accrues only on the cash drawn.

Factoring tends to fit better when the business is very young, has weak financial statements, has customers with strong credit but a thin file of its own, or wants someone else to run collections. Shops and restaurants that collect payment at the register have no receivables to pledge; an SBA Working CAPLine, which SBA describes as an asset-based revolving line, is one more route for businesses that cannot meet conventional line standards.