Accounts Receivable Financing

Maintaining an adequate supply of capital is a chronic problem for a lot of businesses, particularly younger ones struggling to establish themselves. Without sufficient cash on hand, an up-and-coming business could miss out on opportunities for expansion. This problem is only compounded by the difficulty of securing traditional financing options, such as bank loans. However, a business that cannot obtain a traditional loan may still be able to benefit from accounts receivable financing.

What is accounts receivable financing? This is simply a financing arrangement in which an organization draws upon its collection of accounts receivables to secure funds. The way it works is simple: The company seeking funds turns over its receivables to a third-party organization known as a factor. In return, the factor pays the company an amount of money calculated as a percentage of the value of the receivables. Various elements are taken into account while calculating the exact amount that the company will receive; these include the age of the receivables and the ability of the customers to pay the money owed.

Accounts receivable financing, also known as factoring, allows businesses to obtain funding based on the credit worthiness of their customers. With this financing method collecting accounts receivables are shifted to the factoring company. Meanwhile, the company that receives the funds has successfully freed up its capital, which can now be used to pay debts and/or finance expansion opportunities. Accounts receivable funding has enabled many organizations survive and even thrive during difficult times.