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What's the typical Advance Rate on a Startup’s Accounts Receivable Line with a Bank?

Vanessa Kruze, CPA, is a leading expert in startup taxes and tax compliance. Her team at Kruze Consulting has filed thousands of tax returns for companies that have raised billions in VC funding, and her work has been diligenced by leading VCs, attorneys, and M&A teams at the largest technology companies.
Vanessa Kruze, a highly-experienced CPA, brings valuable tax expertise to startups, drawing from her rich background at Deloitte Tax and as a financial controller for a $20 million startup. As the leader of Kruze Consulting, recognized multiple times in the Inc 5000 list, she specializes in navigating the complex tax landscape for startups. Her firm is known for delivering precise and strategic tax solutions, delivering tax credits utilizing advanced tools to ensure compliance and optimize tax benefits for startups throughout the United States.

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We negotiate a ton of Accounts Receivable Lines for Startups at Kruze Consulting. The typical Bank advance rate is 75% to 80% of eligible receivables.

The term “Eligible” is defined in your term sheet. To arrive at Eligible Receivables, you begin with the Total Receivable Balance and subtract any receivables that are generally over 90 days outstanding. Then you factor in concentration issues.

Banks don’t like to advance too much money if the bulk of the receivables are made up of one vendor. Therefore a bank will define “concentration” as any invoices from one vendor that are over a certain % of the total receivable amount. This will be a negotiated metric in your time sheet. Negotiating to the 30% level is a good outcome. This means that any invoices from one vendor that make up more than 30% of your total receivables balance will not be eligible for financing.

You can understand it from the bank’s perspective. If this large vendor decides not to pay, the bank takes a very big loss. Therefore the bank wants to diversify the receivable base and make sure they spread that risk over many different vendors and many different receivables.

A simple example: Suppose a startup has $1M in total receivables. However, there are $100k of that $1M which are 120 days outstanding. That means only $900k can be financed before factoring in concentration.

Furthermore, of the $900k that are within 90 days or less outstanding, Google makes up 40% of the balance. Assuming you negotiated a 30% concentration limit, you can’t finance $90k of that $360k outstanding from Google.

You are left with $810k of Eligible Receivables. Assuming you negotiated an 80% advance rate, you will receive $648k in capital from the line.

That is until your receivables base starts to grow further. The more receivables, the more you can finance. The eligible receivable balance calculation is done usually done once a month.

If you are a new startup with venture funding, you’ve got some great options for your banking relationship. We break down the best startup banks, and help you decide which one you should go with. Whatever you do, don’t go with that gigantic bank down the street - they probably don’t get venture funding or startups! 

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