Receivable financing is a type of loan that a commercial business takes out against its own accounts receivable balance. That A/R balance is the collateral for the loan, which means it is at risk if the loan cannot be repaid. But this can be an attractive financing option for any business that carries a generous receivables balance and has a history of prompt repayment of loans.
And it's a fairly simple financing method. The lender sets up a collateral base for the borrower, based on the sales that are generated by the business. The borrower then draws cash advances against that base, using the money to pay for inventory, improvements, or expansion. Payments are made back to the lender on a monthly basis, just as with any other loan.
The amount of money available through receivable financing will depend upon the collectible balance of the borrower's accounts receivable. In other words, the lender will not take into consideration extremely old customer balances when calculating how much money to lend. This is because, in most cases, the older the A/R is for a particular customer of the borrower, the less likely is the chance that the funds will be collected. Therefore the lender will not want to risk lending funds on those particular receivable items.
There may be other restrictions placed on this type of lending as well. The borrower's accounts receivable balance should be based on business sales. Generally speaking, sales to individual consumers will not be financed in this way. Another consideration is that the company that borrows against its A/R must be a profitable concern. Any company that operates at a loss is not attractive to most corporate credit lenders, and so will not be approved for any type of financing. Finally, the borrowing company should be a mature business. Startups generally do not have enough accounts receivable to appeal to lenders who offer this type of financing.
But what are some of the attractions of receivable financing to potential borrowers? They may include lower interest rates and the flexibility of the loan method. Current accounts receivable is fairly solid collateral of most firms, thereby lowering the risk to the lender and making it more willing to negotiate lower interest rates. Companies that are experiencing rapid growth find that flexibility to be advantageous when the need arises to purchase new equipment or extra inventory. As long as the A/R balance remains strong, the amount available for borrowing remains strong. In other words, success in sales breeds success in financing and therefore further success in sales. It's the type of circle that borrowers and lenders alike can appreciate.
Since receivable financing ties the lender's success to the borrower's, the lender may be willing to offer additional services at no or minimal extra charge. These services may include swifter funding than other types of loans allow. The lender may also have the capacity to run a credit analysis on the borrower's customers. This information would be invaluable in a business's efforts to collect on its accounts receivable. Information, after all, is power. Additionally, this type of financing may come with free checking accounts at the lending banks as well as access to even more attractive credit options in the future.
Overall, receivable financing makes sense for any company that maintains a healthy accounts receivable balance as long as they work successfully to collect those funds. It makes sense for lenders, too, and is growing in popularity more each year.
Corporate Credit Concepts specializes in Receivable Financing. For more information about Receivable Financing and how it might benefit your business, please CLICK HERE for a free phone consultation.