For the uninitiated, accounts receivable refers to the outstanding invoices of a business. These are the amounts that a company will get from its debtors for services and products sold to them. Receivables are usually payable within a year, and accounts receivables are considered as assets on the balance sheet, because the customer is obligated by a contract to pay the concerned amount.
In more simple terms, a receivable is the bill for a sale that has been completed but the money is yet to be paid by the customer. Most businesses, regardless of their size, have just accounts, because a considerable part of the sale is often done on credit. Credit is mostly offered to frequent and special customers. So, what’s accounts receivable financing? We have some quick answers.
Understanding accounts receivable financing
If a company has considerable accounts receivables, it can use them as collateral for getting a short-term loan. This very procedure is known as accounts receivable financing. In case the concerned company cannot repay the loan amount, the lender owns the right to collect the pending invoices or receivables from the debtors directly. In other terms, this is also known as pledging of “receivables” or “off balance sheet” loans.
What’s traditional factoring?
Traditional factoring involves selling of accounts receivables to a lender, but the amount received in loan is less than what is pledged in form of receivables. For example, if the concerned company pledges $100, they will get around $70 or little more from the lender, but not the full amount. This is quite different from asset based lending, because the business is in a better position to choose the accounts they want to pledge. However, on the flip side, there can be additional lender fees, and the credit lines are considerably smaller.
What are the benefits?
You can induce cash into your business as and when required, especially if a considerable amount of your sales is done on credit. Also, there are many options, especially for growing businesses. Interstate capital supports small businesses with accounts receivable financing besides others. The factoring fee is lower with some lenders, and you can get a considerable amount of money with a high advance rate. There is no wanted debt in your balance sheet, which is another advantage.
Just do your research before you look for factoring partner. Most companies offer online access to the paperwork, and you can expect to get the money within a few days.