Account Receivables Financing
A type of financial service where a business sells or transfers the title of the accounts receivable to a lending company, which then acts as principal, not as agent. Account receivable financing is structured based on either an asset sale or a loan.
The receivables are sold with or without recourse, which means the lender must bear the risk of collection. Account receivables are commonly understood to be highly liquid assets which then in return become theoretical values for lenders. Since the assets are expected to be paid, some companies view account receivables as a burden on their company. Account receivables cannot be converted into cash immediately.
The companies known for handling the process of account receivables are known as factoring companies. The top-of-the-line factoring companies focus on the business behind account receivable financing. These companies are very proficient in the way they handle their accounts because many accounts receivable link with the companies' accounts which provide for quick and easy capital. With the expansion of many technologies, it makes it easier for these accounts and companies to be linked with one another.
Account receivable financing proves to be easier for businesses compared to any other form of capital financing. There are two types of account receivable financing structures which are asset sales and loans.
Regarding asset sales, a company usually sells accounts receivable to be a financer. When a business receives capital in the form of a cash asset it replaces the value of the account receivable on the balance sheet. There are several bookkeeping systems that factoring companies use as their main operating system. These technologies make it more convenient for businesses to sell their invoices as they are booked, allowing them to receive immediate capital. Factoring companies emphasize most of their time focusing on short-term receivables. In an asset sale structure, factoring companies can create revenue on the principle of value spread.
Account receivables can be structured in the form of a loan agreement. The way loans are structured depends on the financer. The reason businesses appreciate loans versus asset sales is because account receivables are not sold under a loan. Many companies appreciate account receivable financing because it allows companies to receive instant cash opposed to working with companies that make the process more extensive. Companies do not have to worry about repayment schedules when they use accounts receivable for asset sales. In addition, when a company receives a factoring loan, they can obtain 100% of the funds immediately.
When factoring companies look to onboard a new company onto its platform it considers several elements to determine if the company is eligible. The account receivables owed by larger companies equals more valuable invoices owed by smaller companies. Newer invoices are typically more preferred than older invoices.
On the other hand, when using accounts receivable, it may carry a negative connotation. The cost behind using account receivable financing is typically higher than if you were to use traditional lenders. In a loan structure, interest levels may be higher than if they were written off amounts or discounts.
For more information on Account Receivables Financing check out this article on SMB Tips to Manage Accounts Receivable.