A/R Financing vs Line of Credit (Canada): Which Fits Your Situation?

By Brent Finlay, Business Finance Specialist (CPA,CMA MBA)
Originator of $150M+ in Loans & Leases for 100’s of Canadian SME’s | Creator of the BFE 5-Step Strategic Funding Process | Fractional CFO & Change Management Expert.
Published:  Feb 12, 2026.   Updated: Feb 16, 2026

If you’re seeking working capital, two options come up constantly in Canada:

  • a business line of credit (LOC), and
  • accounts receivable (A/R) financing.

They can both solve cash timing issues, but lenders underwrite them differently, they behave differently in growth, and one can be much easier to obtain than the other depending on your situation.

This page explains the practical differences and helps you choose the right “tool” so you don’t waste weeks chasing the wrong facility.

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The quick difference (plain language)

Line of credit (LOC)

A LOC is typically underwritten primarily on the overall strength of the business:

  • financial performance and stability
  • management and reporting quality
  • collateral comfort (often “general” security)
  • bank relationship fit

In many cases: the LOC limit is constrained by policy and ratios, not just assets.

A/R financing

A/R financing is underwritten primarily on the quality of your receivables:

  • who owes you money (customer quality)
  • how reliably they pay (aging/collections)
  • how concentrated the customer base is
  • whether invoices are verifiable and financeable

In many cases: the borrowing capacity scales more directly with receivables.

Which one fits better? (decision guide)

A LOC is usually a better fit when ...

  • financials are stable and lender-ready
  • the business has consistent profitability and predictable cash flow
  • reporting is timely and clean
  • you want lower “operating friction” (fewer reporting requirements)
  • you want a relationship-based facility that supports multiple needs

Typical outcome: a simpler structure, but sometimes a smaller limit than the business wants.

A/R financing is usually a better fit when…

  • growth is strong but cash is tight because customers pay slowly
  • you have significant A/R that is collectible and verifiable
  • the business needs more working capital capacity than a conventional LOC will provide
  • you’ve been declined for a traditional LOC due to ratios, covenants, or policy limits
  • the cash gap is caused by timing, not structural losses

Typical outcome: more capacity and scalability—if the receivables are strong.

How lenders evaluate each option

What lenders focus on for a LOC

LOC underwriters typically care most about:

  • trend of revenue and margins
  • profitability and debt service capacity
  • balance sheet strength and leverage
  • reporting quality and internal controls
  • management credibility and story
  • existing debt structure and renewals/maturities

If the business is uneven, highly seasonal, or has thin margins, LOC approvals can get tight.

What lenders focus on for A/R financing

A/R underwriters typically care most about:

  • A/R aging and historical collections
  • customer concentration (top 5–10 customers)
  • invoice validity (proof of delivery/service)
  • dispute/chargeback history
  • customer quality (large, stable payers vs small/high-risk)
  • whether receivables are assignable and insurable/confirmable if needed

If the A/R is clean and diversified, A/R financing can be surprisingly strong—even when a bank LOC is difficult.

Cost and “friction”: what business owners should expect

LOC: usually lower friction

  • generally simpler reporting
  • fewer day-to-day controls
  • less operational involvement once established

A/R financing: more reporting, more control

A/R facilities often involve:

  • regular reporting (borrowing base)
  • verification rights
  • controls around collections or assignment
  • tighter monitoring (especially early on)

That “friction” can be worth it if it gives you the capacity you actually need.

Common reasons A/R financing doesn’t work

A/R financing can be difficult when:

  • A/R is too concentrated in one or two customers
  • invoices are disputed or frequently adjusted
  • customers are small, inconsistent payers
  • terms are long and unpredictable (or there are offsets/holdbacks)
  • documentation is weak (hard to verify delivery/performance)
  • the business is using A/R to cover ongoing operating losses

A/R financing works best when receivables are high-quality and collectible.

Common reasons LOC applications stall or get declined

A LOC often stalls when:

  • reporting is delayed or unclear
  • margins and cash flow don’t support the requested limit
  • leverage is high or debt structure is mismatched
  • covenant risk is present (or the lender expects it will be)
  • the lender doesn’t understand the model or the risk story
  • the request is broad (“we just need cash”) without clear use of funds

A decline often means “wrong lender or wrong structure,” not “no options.”

What documents you’ll need (either way)

To move faster, prepare:

  • year-end statements + latest interim statements
  • AR aging and customer concentration list
  • AP aging (often requested)
  • recent bank statements
  • debt schedule (balances, rates, maturities, payments)
  • clear use of funds and timeline
  • a simple cash flow view (13-week is ideal if timing is tight)

Practical scenarios (what I see most often)

Scenario 1: Growing quickly, cash always tight

If growth is real and receivables are strong, A/R financing often fits better because capacity scales with sales.

Scenario 2: Stable business, needs a buffer

If the business is stable with lender-ready reporting, a LOC is often the simplest and cleanest solution.

Scenario 3: Declined for a LOC but has strong receivables

This is a classic A/R financing fit—especially when the decline is policy/ratio-driven, not receivable-driven.

Scenario 4: Cash crunch and time pressure

The “right” answer is often a hybrid:

  • A/R facility + a short-term bridge plan
  • refinance + working capital
  • tighten reporting + faster underwriting fit

How to choose the right next step

If you want to avoid wasted time:

  1. Identify the true cause (timing gap vs structural losses vs debt mismatch)
  2. Review A/R quality and concentration
  3. Match the structure to the asset and the timeline
  4. Build a clean, lender-readable package that answers the obvious questions

Frequently Asked Questions

Is A/R financing the same as factoring?

Not always. Factoring is one form of receivables financing, but there are also A/R-backed revolving facilities that operate more like a line tied to receivables. The structure depends on the lender and the file.

Which is easier to get in Canada: a LOC or A/R financing?

It depends on your strengths. If financials are strong and reporting is clean, a LOC can be straightforward. If the receivables are high-quality but the bank LOC doesn’t fit policy or ratios, A/R financing can be easier.

Does A/R financing work if my receivables are concentrated?

Concentration can be a challenge. Some lenders will still proceed if the payer is high-quality and terms are clear, but high concentration often reduces advance rates or requires additional controls.

Will A/R financing improve cash flow immediately?

It can—once the facility is in place and invoices are eligible. The biggest delays usually come from documentation, verification, and lender fit.

What do lenders look at first for A/R financing?

hey look at A/R aging, customer concentration, eligibility (disputes/offsets), and whether invoices can be verified and collected reliably.

Can I switch from A/R financing to a bank LOC later?

Often, yes. Many businesses use A/R financing during growth or transition, then move to a conventional LOC once reporting, ratios, and bank fit improve.

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Need help choosing the right working capital structure?

Most people contact me when they have a pressing financing issue and don’t know where to start—or they’re stuck mid-process, have been declined, or need a clear next step. If you’re too busy running the business (or supporting a customer) and want an experienced financing specialist to map options and move things forward, reach out.

**Three ways to move forward:**

1. Access my free 5 Step Strategic Funding Process through this link 
2. Email your situation through my contact form
3. Book a 15-minute discovery call through this calendar link

Or call: 905-690-9874

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**About the Author**

Brent Finlay helps Canadian SMEs locate, secure, and manage business capital ...lines of credit, loans, and leases ... across working capital and tangible asset financing (AR, inventory, equipment, and real estate). He also provides fractional CFO support to improve cash flow visibility, financing readiness, and decision-making through growth, stress, and transition.