Accounts Receivable Financing & Factoring (0 listing found)

Accounts Receivable Financing

Accounts receivable financing, accounts receivable factoring, or Accounts receivable loans are loans taken out to provide working capital for a small business, with its accounts receivable (invoices sent out to clients for goods or services rendered) as collateral. Depending on the ages of the various accounts receivable invoices, a company can usually borrow between 60 and 80 percent of their total value. Older accounts receivable invoices are considered higher risks (the older they are, the less likely they are to be repaid) and so are worth less. Some lenders will not loan on accounts receivable invoices that are over 90 days old.

Accounts receivable loans are short-term loans, repaid as the company collects their accounts receivable from their clients. Unlike accounts receivable factoring/funding, the business still maintains ownership of the accounts receivable and is responsible for collecting them on time and making payments on time.

Obtaining Accounts Receivable Loans - Companies that take out accounts receivable financing must be established enough to have amassed a fair amount of assets in the form of accounts receivable, as well as be able to know that their clients will indeed pay their invoices. Such a transaction is not suited for budding businesses, or businesses looking to expand and branch out. Accounts receivable loans work best to provide working capital for ordinary day-to-day expenses, such as equipment or rent.

This form of financing is a type of secured loan in which accounts receivable are pledged as collateral in exchange for cash. The loan is repaid within a specified short-term period as the receivables are collected. Accounts receivable financing is most often used by businesses facing short-term cash flow problems. The major source of accounts receivable financing for small businesses are commercial finance companies.

Accounts receivable are typically "aged" by the borrower before a value is assigned to them. The older the account, the less value it has. For example, Accounts receivable financing companies often lend approximately 75 percent of the face value of accounts less than 30 days old. Some lenders don't pay attention to the age of the accounts until they are outstanding for over 90 days, and then they may refuse to finance them. Other lenders apply a graduated scale to value the accounts so that, for instance, accounts that are from 31-60 days old may have a loan-to-value ratio of only 60 percent, and accounts from 61-90 days old are only 30 percent. Delinquencies in the accounts and the overall creditworthiness of the account debtors may also affect the loan-to-value ratio.

A monthly interest rate on accounts receivable financing is calculated by applying a daily percentage rate to the receivables outstanding each day (the less the outstanding receivables, the lower the interest charge). A default on payment can result in the accounts receivable financing company seizing the pledged accounts receivable. Some states require notice to the business's debtors that their debt has been pledged as loan security. In states that do not have this requirement, some businesses do not notify their customers because the businesses fear that customers might perceive this method of financing as a sign of financial instability.