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

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Kruze Consulting Startup Q&A Author
Vanessa Kruze
Founder, CPA

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.

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