Accounts Receivable Loans

Search For Accounts Receivable (Invoice) Loans

Accounts Receivable Loans: Obtaining working capital for your business using financial assets your business has already generated and earned.

Overview: Accounts Receivable Factoring:

Accounts Receivable Financing - also termed invoice financing, invoice factoring, receivable financing or just factoring - are asset based loans that 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's 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 those 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 to get cash immediately. 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. But, with an account receivable business loan, business can get need cash now to work on or complete the next job or to increase inventory or meet current expenses.

A Factor (an accounts receivable financing company) will purchase the accounts receivable (invoice) at a discount - usually 80% 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 amount 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 ongoing cash flow.

These asset based loans are not based on the credit-worthiness of the business that sells the receivable but are 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 a simply way for a business to obtain working capital using business financial assets.

- Back To Top - Search For Accounts Receivable (Invoice) Loans

Benefits:

The following are some of the major benefits that a business can achieve by using their accounts receivables to obtain working capital:

• Your business has already earned these funds - thus, it not quite a loan but more an advance against actual cash that you have yet to receive. This means that you don't have to worry about making monthly loan payments or paying back a loan - as the payment stems from the conversion of the asset (the accounts receivable) - an asset that you already own.
• Quick working capital that can be immediately plowed back into you organization to generate more business or fulfill other orders. Keep in mind that while it may be better (more cost effective) to use your own cash, many businesses have no other choice but allow their customers 30 or more days to pay (extending them credit) as that is just the way business is done in their industry. If your business does not extend its customer's credit, it might (will) lose those customers to other businesses who will.
• These loans (advances) do not rely on your credit (personal or business) but on the strength of your customer's willingness to pay you. In this day and age, any growing small business owners has taken a ding or two on their credit - making it nearly impossible to get outside capital from any other source. Accounts receivable factoring can get around any credit issue and easily provide your business the working capital it needs.

- Back To Top - Search For Accounts Receivable (Invoice) Loans

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.

- Back To Top - Search For Accounts Receivable (Invoice) Loans

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 a working capital loan whenever it needs it and not at the whim or financial strength of the bank.

- Back To Top - Search For Accounts Receivable (Invoice) Loans

Copyright 2007 - 2012 - Business Money Today - All rights reserved