Accounts Receivable Financing

Accounts Receivable financing is an excellent option for an existing company to obtain working capital. This type of financing is also known as invoice discounting. Receivables financing allows a business to borrow money and use invoices of sales made as collateral.

The age of your invoice will determine the percentage the lender will lend against the face value of your receivables. For example, a commercial lender may lend you 75 – 80% of the face value of the receivables 30 days old. Invoices 31 to 60 days may only qualify to 50 – 60% of invoice face value. The discount amount will vary slightly from lender to lender. These are general discount ranges for the purpose of illustration. Invoices older than 2 months usually will not be considered as reasonable risks for most lenders.

How does this kind of transaction work?

Suppose you own a dry cleaning near a military base. The federal government awards you a contract to clean the uniforms of service personnel. Your invoices are paid “net 30” or paid in 30 days. You need to purchase additional presses and hire two more pressers to handle the increased workload. You have one problem – cash flow. You don’t have the extra cash to purchase the equipment or to hire the employees. The solution to your problem: approach a commercial lender who deals in accounts receivable financing. The lender will give you approximately 80% of the value of your invoices. You repay the lender as the customer pays you. In this example the customer would be the federal government. You are able to purchase the presses, hire the pressers and grow your business – problem solved.

What Businesses Use Accounts Receivable Financing?

Receivables financing is a good funding alternative for a business owner who has a large volume of invoices and in need of operating capital. Some typical businesses that can readily utilize invoice discounting are service businesses, such as dry cleaning or accounting enterprises. Small manufacturers and job shops, which have contracts with larger corporations, often have a large volume of invoice business. They are also excellent candidates for receivable financing.

In some states you may have to notify your customers that your have pledged your receivables as collateral. The lender will seize the receivables and collect from your customers should you default on the loan. This action will not make a favorable impression on your customers! Make sure that you will be able to repay the loan (as you should in any situation) before committing to this type of financing.

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