Account Receivable Financing by Raul Esqueda
What are Accounts Receivables
Accounts receivables are accounting transactions that show the money owed by a customer to the organization against goods and services provided by the organization. These transactions are carried out by generating an invoice or using electronic mailing. They are also called trade receivables and are treated as current assets of the company. The payment for such sales is paid within a particular timeframe agreed upon by customer and the business organization.
What is Account Receivable Financing
Account receivable financing is popularly called accounts receivable factoring or accounts receivable funding. It is a short term financing scheme in which accounts receivable serve as collateral in exchange for cash. It helps to convert credit sales into cash flow for smooth functioning of the business and maintain the working capital of the business. Account receivable financing is the best method to meet the cash shortage in organizations with limited financial resources. Accounts receivable funding is a perfect option for companies whose credit requests have been declined by the commercial banks. It helps small and mid-size companies regain control and ownership over their business.
Account Receivable Financing Process
Account receivable financing process involves pledging the outstanding invoices or receivables to finance or factoring company to get cash. The amount of money given against account receivables depends on value of the receivables. The value is calculated on bases of the industry, average days outstanding, risk and variations in the sales agreements. Generally, accounts receivable over 90 days are not considered eligible for financing. The advance can be repaid as the receivables are collected.
Benefits of Account Receivable Loans
Easy Receivable Collections: This reduces the risk involved with accounts receivable as it passes on your collections to the finance or factoring company and it helps to manage your accounts receivables effectively.
Smooth Flow of Working Capital: As the sales cycle and purchase cycle do not run parallel most of the times, account receivable loans fill up the gap between the two financial transactions by providing immediate cash to the organization against the outstanding invoices or receivables. It provides a free flow of working capital and helps to meet seasonal fluctuations of business capital.
Quick Financing Process: The account receivable financing process is easy and quick as it does not require a business plan documents or tax statements.
Helps in Business Expansion and Growth: It provides the necessary capital required for the growth of the company and helps it to make best use of business opportunities without running short of financial resources.
Raul Esqueda, President of 1st Commercial Credit has written many articles on various business credit topics. Find more articles at www.1stcommercialcredit.com
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