Accounts receivable financing: how to help clients restore cash flow

Published Wednesday 17 June 2026

Table of contents

• What is accounts receivable financing?
• 3 types of accounts receivable financing
• AR factoring (invoice factoring)
• Invoice discounting
• Debt collection agencies
• How to help clients choose the right option
• How to set up accounts receivable management for clients
• Simplify accounts receivable management with Xero
• FAQs on accounts receivable financing

Key takeaways

• Accounts receivable financing lets clients access cash tied up in unpaid invoices, covering gaps caused by long payment terms or seasonal slowdowns.
• Three main options exist: AR factoring, invoice discounting, and debt collection agencies. Each suits different client situations, and your role is to match the right tool to the problem.
• Proactive AR management reduces the need for financing altogether. Automated reminders, clear payment terms, and regular reviews keep cash flowing before it stalls.
• As a trusted adviser, you're well placed to spot cash flow warning signs early and guide clients toward the most cost-effective solution.

What is accounts receivable financing?

When clients have strong sales but can't cover their bills, the issue is often timing rather than performance. Accounts receivable (AR) financing is an umbrella term for any method that turns unpaid invoices into working capital before customers actually pay.

For many New Zealand businesses, especially those with 30, 60, or 90-day payment terms, the gap between issuing an invoice and receiving payment can strain day-to-day operations. Payroll, supplier payments, and growth investments can't always wait.

As an adviser, you'll encounter clients who don't realise these options exist, or who confuse one type with another. Understanding the differences puts you in a strong position to recommend the right approach at the right time.

3 types of accounts receivable financing

There are three main ways your clients can convert outstanding invoices into cash. Each works differently, carries different costs, and suits different situations.

• AR factoring (invoice factoring): the client sells invoices to a factoring company, which advances most of the value upfront and handles collections
• Invoice discounting: the client borrows against invoice values but retains ownership and continues collecting payments themselves
• Debt collection agencies: a last-resort option for invoices that are significantly overdue, where a third party pursues payment on the client's behalf

The sections below break down how each one works, what it costs, and when to recommend it.

AR factoring (invoice factoring)

With AR factoring, your client sells their outstanding invoices to a factoring company. The factor typically advances 80 to 95 percent of the invoice value upfront, then collects payment directly from the client's customer. Once the customer pays, the factor releases the remaining balance minus a fee.

This is often the most accessible option for smaller businesses or those with limited credit history, since approval depends on the creditworthiness of the client's customers rather than the client themselves. It's worth noting that the factoring company takes over the collection process, which means the client's customer will know a third party is involved.

There are several advantages to consider when discussing this option with clients:

• Clients can access cash within 24 to 48 hours.
• Approval is based on customer creditworthiness, not the client's own credit.
• Outsourced collections reduce admin burden.
• The arrangement doesn't add traditional debt to the balance sheet.

There are also some drawbacks to weigh up:

• Fees can be higher than other financing methods.
• The client's customers deal directly with the factor, which may affect relationships.
• Some factors require long-term contracts or minimum volumes.
• Not all invoices may qualify, particularly those with extended payment terms.

Invoice discounting

Invoice discounting works similarly to factoring in that the client borrows against their outstanding invoices, but there's one key difference: the client retains ownership of their debtor book and continues managing collections. A lender advances around 80 percent of the invoice value, and the client repays the advance plus a fee once customers pay.

Historically, invoice discounting in New Zealand was mainly available to larger businesses. That's changed. A growing number of New Zealand fintechs now offer invoice discounting products tailored to smaller businesses, making this option more accessible than it was a few years ago.

There are several advantages to invoice discounting:

• The client's customers don't know a third party is involved.
• The client keeps control of customer relationships and collections.
• Fees are typically lower than factoring.
• Flexible arrangements are increasingly available for smaller businesses.

There are also some limitations to consider:

• The client takes on the collection workload themselves.
• Approval criteria can be stricter, often requiring a track record of reliable debtor payments.
• If customers don't pay, the client still owes the lender.
• The arrangement may require ongoing reporting to the lender.

Debt collection agencies

Debt collection is a different beast. It's not a financing tool in the traditional sense; it's a recovery mechanism for invoices that are significantly overdue. When a client has exhausted their own follow-up efforts and an invoice is 60, 90, or more days past due, a collection agency may be the most practical path to recovering some of the money owed.

Collection agencies typically charge a percentage of the recovered amount, or a flat fee. Some operate on a "no recovery, no fee" basis. It's worth flagging to clients that using a collection agency can affect their relationship with the customer, so this is generally a last resort rather than a routine cash flow tool.

There are some advantages to engaging a collection agency:

• It can recover cash from invoices the client has likely written off.
• It frees up the client's time from chasing difficult debtors.
• "No recovery, no fee" models reduce the client's financial risk.

The downsides are significant, which is why this is typically a last resort:

• Fees can be substantial, often 15 to 50 percent of the recovered amount.
• The customer relationship is usually damaged or lost.
• There's no guarantee of recovery.
• This approach isn't suitable for routine cash flow management.

How to help clients choose the right option

The right choice depends on the client's situation, and that's where your advisory value comes in. Rather than defaulting to one solution, walk through a few key questions with the client to narrow the field.

Start by assessing the urgency and scale of the cash flow gap. A client dealing with a temporary seasonal dip needs something different from one whose debtors regularly pay 90 days late. Consider these factors when framing the conversation:

• Invoice age: current invoices suit factoring or discounting, while significantly overdue invoices may need a collection agency
• Customer relationships: if preserving the relationship matters, invoice discounting keeps the process invisible to customers
• Volume and frequency: ongoing cash flow challenges may warrant a standing facility, while a one-off gap might be resolved with selective factoring
• Cost tolerance: factoring fees are higher but include collections; discounting is cheaper but requires internal effort
• Business size: smaller clients may find factoring more accessible, while growing practices can now tap into fintech discounting options

Build this into your advisory workflow. When you spot rising debtor days or tightening cash reserves during a regular review, raise the conversation before the client hits a crisis point.

How to set up accounts receivable management for clients

The best way to reduce reliance on AR financing is to tighten up receivables management before cash flow becomes a problem. Here's a step-by-step approach you can build into your advisory workflow.

1. Set clear payment terms on every invoice

Make sure each client has consistent, realistic payment terms that suit their industry. Terms should appear prominently on every invoice, along with accepted payment methods. If a client is regularly extending 60-day terms when 30 days is the norm, that's a conversation worth having.

2. Automate payment reminders

Xero's invoicing features let you set up automated payment reminders that chase overdue invoices without anyone lifting a finger. Online invoice payments make it easier for customers to pay on the spot, reducing delays caused by manual bank transfers.

3. Run regular debtor ledger reviews

Build a monthly or fortnightly check on ageing receivables into your client workflow. Look for patterns: are the same customers paying late? Are payment terms realistic for the industry? Is the client invoicing promptly after delivering work?

4. Act on warning signs early

When you spot rising debtor days or a concentration of risk in a single customer, raise it with the client before it becomes a crisis. Proactive management keeps cash flowing, and when financing is still needed, clean, well-managed receivables make the client a stronger candidate for favourable terms.

Simplify accounts receivable management with Xero

Helping clients stay on top of their receivables is easier when you've got the right platform behind you. Xero gives you a single view of each client's invoicing, cash flow, and debtor status, so you can spot issues and advise proactively rather than reactively.

If you're not already part of the Xero partner program, it's free to join and gives you access to tools built specifically for practice management and client advisory. Join the partner program

FAQs on accounts receivable financing

Here are some frequently asked questions about accounts receivable financing and how it applies in practice.

Is accounts receivable financing the same as a business loan?

No. AR financing is tied to specific invoices rather than the client's overall creditworthiness. The funding amount is limited to the value of outstanding invoices, and most arrangements don't add traditional debt to the balance sheet.

How quickly can a client access funds through AR factoring?

Speed depends on the factor's onboarding process and the quality of the client's invoicing records. First-time clients may take longer as the provider verifies debtor creditworthiness, while established relationships with a factor often mean same-day processing for new invoice batches.

Can small businesses in New Zealand use invoice discounting?

Yes. Eligibility criteria vary by provider, but most look for a consistent track record of invoicing commercial customers and a debtor book with reasonable payment histories. If your client issues regular invoices to other businesses, it's worth exploring what's available in their size bracket.

When should you recommend a debt collection agency over factoring?

Debt collection is best suited to invoices that are significantly overdue and where the client has already exhausted their own follow-up. Factoring and discounting work with current or recently issued invoices; collection agencies deal with invoices the client may have already provisioned against.

How does accounts receivable management reduce the need for financing?

Tighter invoicing processes, clear payment terms, automated reminders, and regular debtor reviews all help payments arrive sooner. When cash is flowing predictably, clients are less likely to need external financing to bridge gaps. Tools like Xero's accountant and bookkeeper guides can help you build these systems for your practice.