The XBanker
Business Financing eXpert
Accounts Receivable Financing
May 13th, 2008
Accounts Receivable (“AR”) Financing is often confused with Accounts Receivable Factoring. Contrary to what some are professing on the web, these are two very different financing options. If you need a review of Factoring, read my post: How Factoring Can Benefit Your Business.
Accounts Receivable Financing consists of only 2 parties: the business owner and the lender (remember: AR Factoring involves 3). An “accounts receivable” is money that is owed to the business. Most businesses will have multiple accounts that are being paid on at any given time. An invoice is the usual method provided to advise customers of the amount they owe a company. All such AR invoices issued to customers are shown as an asset on the business balance sheet. The more assets you have, the less risky you are in the eyes of lenders: Banks love assets.
Not all assets are created equally though. Some assets depreciate (decrease in value) and some appreciate (increase in value). Some can be converted into cash rather quickly and others take a long time to become liquid. Accounts Receivables are usually viewed as good assets because most translate into cash relatively fast; typically in 90 days or less.
When a bank issues a loan to your company, secured by your AR, they don’t pick a certain number of your invoices and stake their claim on those specific ones. They are interested in the performance of your entire portfolio, the change in volume over the past few months and your collections history. If you can document, using your financial statements, that you have $XX,XXX as AR and your customers typically pay on time, you might be able to secure a bank loan or line of credit for 50% to 80% of “X.”
Again, this is different than factoring because you are still responsible for collecting on the invoices. It’s business as usual for you; now you just have a little working capital to go with it.
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May 27th, 2008 at 8:47 am
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