Accounts Receivable Loans For Working Capital

Accounts Receivable Factoring:

Improve your cash flow by factoring your accounts receivables and get the working capital you need for growth, expansion, inventory, payroll, marketing or any business capital need.

Accounts Receivable Loans / Working Capital Loans

Accounts Receivable Financing

- also termed invoice financing, invoice factoring, receivable financing or just factoring - occurs when a business sells its outstanding or future accounts receivables to a financial entity (Factor). A financial entity can be a bank, a financial institution, or a private non-bank company who purchases a business' accounts receivables and advances money against them.

Invoice factoring is a very efficient method of raising working capital for businesses that do not conform to typical lending standards: Businesses that have little, bad or no credit; that have marginal revenues that do not support the regular monthly payments of a traditional loan; Or that have purchase orders and do not have the working capital or cash flow to complete the new projects until past invoices are paid.

Accounts receivable loans are a very simple financial transaction on a business's behalf. When a business generates an invoice (usually after the shipment of goods or completion of service) the business can sell that invoice for cash. Usually, businesses provide their customers up to 90 days to pay an invoice. This is in essence extending credit to customers for up to 90 days.

- Continues Below -

A Factor will purchase the accounts receivable (invoice) at a discount - usually 80% and up of the invoice amount. The remaining 20% is held in reserve until the invoice is paid. When the account is paid by the customers, the Factor will remit the payment (including the reserve) to the company less its advance and fees. The Factor usually charges the seller a service charge, as well as interest based on how long the Factor must wait to receive payments from your customer or company.

Typically, after purchasing a company's accounts receivables, if already submitted to the customer, the factor will resubmit the invoice with a new payment address (the address of the Factor). Most Factors will explain this to the customer or could re-invoice using the original company's letterhead (keeping the customer virtually unaware of the transaction - as factoring can be arranged confidentially, so that customers and suppliers are unaware that the business is borrowing against sales invoices before payment is received).

The Factor holds ownership of the invoices (receivable) and has first claim to any and all revenue generated when the invoice is paid. Factors will also provide collection services should the customer miss its payment deadline - further saving the business added collection expenses and helping its cash flow.

Factoring is not based on the credit-worthiness of the business that sells the receivable but is more focused on the credit-worthiness of the business' customer (the person, company, government entity or organization that has contracted with the business for goods or services which originally generated the invoice). Keep in mind that some Factors may refuse to lend/advance against some invoices, e.g. if it believes the customer is a credit risk, invoices to overseas companies, invoices with very long credit terms, or very small value accounts receivables.

Factoring receivables is not a business loan per say and is not treated as a loan facility (although it is usually called a loan). It is the transfer (purchase and sell) of an asset (the accounts receivables) from one organization to another (the factor). But, it is simply way for a business to obtain working capital using business financial assets.

Accounts Receivable Lines Of Credit

Businesses, who typically generate numerous invoices through the operation of their business, can sell their current and future accounts receivables (those usually under 90 days) to a financial entity (Factor) for a working capital line of credit. The Factor will set a line of credit based on past volumes of sales and purchase each approved invoice as it is generated.

Lines of Credit (LOCs) can have a set limit when opened based on account receivable sizes. These LOCs are usually drawn down as the company needs working capital to finance operations or cash flow to complete additional purchase orders. Sometimes, the LOCs can be set as revolving where the company can draw, pay back, and draw again. The limit of the LOC fluctuates with the company's ongoing accounts receivable balances. Under this later scenario, the Factor will monitor the company and audit its accounts receivables while the LOC is outstanding.

Understanding accounts receivable LOCs may be better explained with the following:

On a particular day, a company has an outstanding Gross Accounts Receivable Balance of $400,000. A Factor will adjust this gross amount for items like receivables over 90 days, receivables to foreign entities, or receivables to risky customers. Let's say this discount is $50,000. This will leave a net eligible accounts receivable balance of $350,000. At an advance rate of 80%, the company could advance up to $280,000.

A revolving LOC would simply fluctuate based on new invoices and recent payments against outstanding invoices. Should the company generate additional accounts receivables of $100,000 net and receive payments of say $50,000 net, the company would be able to draw again against these amounts up to the LOC limit.

Accounts Receivable Loan Fees

Factoring fees can be confusing when compared to traditional business loan rates. If a Factor quotes a rate of 4% for 30 days this does not mean that the annual rate is 48% (4% times 12 months) as would be the case with a bank or traditional business loan. Now, the amount is not 48%. Here's why: Let's say that a company factors $120,000 in accounts receivables over the course of a year on a monthly basis of $10,000 per month. If the factor fee was truly 48%, the company would be required to pay $57,600. However, the company is only required to pay 4% of the $10,000 per month or $400 monthly. If this is done each month, the company only pays $4,800 for the year or simply 4% of the total annual factor of $120,000 - in some cases this can be much lower than traditional bank or business loans.

Most factoring fees are set based on a per diem (daily) rate or per 30 day rate. The per diem rate is typically the best rate for the company.

With a per diem rate of say 0.085% (usually ranges between 0.085% to 0.095%), a company would be charged $8.50 per each $10,000 outstanding. Should this amount be outstanding for 15 days (until the customer pays), the total amount would be $127.50 for the 15 days.

A per 30 day rate of say 3% would charge 3% of the $10,000 for an entire 30 days regardless if the invoice was paid sooner. Under this scenario, the amount charged for 15 days would be $300.

Account receivable loans are a great business loan option for companies who cannot qualify for traditional business loans but need working capital for their overall operations or cash flow for their operating cycle. Plus, if your business has accounts receivables, it can get money whenever it needs it and not at the whim or financial strength of the bank.

- Back To Top -

Please see each individual business's applications and guidelines for details about terms and conditions of offers. We take reasonable efforts to maintain accurate information. However the information presented is without warranty. When you click on the "Get Started", "Apply Now", "continue" or similar button or company logo you can review the terms and conditions on the lender's web site in most instances. Simply clicking a link does not guarantee approval or acceptance in any program.