Understanding Accounts Receivable Financing

It is standard for a company needing financing to turn to a traditional lending source such as a bank. Another option that companies can select is financing that utilizes their outstanding accounts receivable to bring quick cash into their company.

Some of the Ways A Company Can Use Their Account Receivable for Financing

Accounts receivable financing is something where companies receive capital based on their accounts receivable. Since lenders often think of accounts receivable as a quite liquid asset, lenders find it easy to offer to finance based on this asset.

Lenders often refer to this type of financing by the name factoring. Most lenders that do this type of lending will often focus solely on this type of lending, although it can also be a part of a more comprehensive array of financing options from a lending company.

Some of the Ways This Type of Financing Gets Structured

A widespread type of accounts receivable financing is something called asset sales. When companies utilize this type of financing, they sell their accounts receivable to a lender. This method is very similar to when banks sell off a portion of loans owed to them.

In this type of agreement, businesses receive capital which is a cash asset on their books that replaces the value of the account receivable they currently own. It is not at all uncommon for a business to take a write-off on the unfinanced portion of their account receivable balance depending on the principal-to-value ratio of the arrangement.

When a business utilizes this type of financing, they often can get upwards of 90% of the value of their outstanding accounts receivable. When this type of transaction occurs, the lender financing the loan takes over the collection of the accounts receivable.

Lenders and businesses can often structure this financing like a typical loan agreement. One advantage for a business in this arrangement is that the accounts receivable on a company’s books don’t get sold. Instead, companies receive a cash advance based on the accounts receivable balance.

Loans of this type have secured or unsecured variations, and it is often the case that the outstanding invoices are the sole collateral for the loan. Under this type of arrangement, companies need to repay the loan much in the same way they would a traditional loan but using receivables as the payment method.

Businesses often love this type of financing because it offers them quick cash without a lengthy application process. Because of this, this financing vehicle is usually a great alternative to businesses that cannot receive traditional financing.