The Advantages and Disadvantages of Receivables Financing


Account Receivable or AR financing is one of the traditional types of commercial funding. To put it simply, it is a method that encourages the selling of a business’ receivables or outstanding invoices at a lower price to a specialized finance or factoring company. Usually, it is called “the factor.”

Factoring company gets the risk on your business receivable and in return, they will issue your business with a smooth influx of money. The money issues on the receivable will vary depending on the quality and age of the receivable items.

For business owners, receivables financing is irresistible. Because of the many benefits, it can give businesses to help them grow and become financially stable. The process offers the attraction of acquiring immediate financing, thus giving every business owner the chance to grow their business.

Small Business and Accounts Receivable Financing

In today’s new trend, it could be arguably notable that traditional or mainstream micro-business financing like business loans and credit cards are now inadequate.

Many business owners who run small shops and services find this type of financing useful for their business. Hence, small business owners may think that this kind of loan or financing will help their businesses to grow and save any cash flow shortages.

Sometimes, small business owners will use their account receivable items as a savior for financing. But they need to ensure that every loan or financing applications have requirements and limitations.

Things You Should Know About AR Financing

Before heading to account receivable financing, you must be knowledgeable about the things that are associated with this kind of loan or financing.

1# Loan

This type of AR financing will take the form of a sell of business assets. The due accounts or items will be sold to another business in exchange for cash.

The lender will only pay for a share of the total account receivable value to the company. Once the item is sold, the lender will get the responsibility of collecting the owed money

2# Collateral

When account receivable serves a structured loan, the account receivable book will be the collateral to the loan. The business will retain the ownership of the account receivable book and the responsibility to collect those debts. Business owners should make sure that the deal will be set as a prime rate, which is the very least interest amount

3# Invoice Dating

The exact purchase date is another essential key that is needed in the agreement. In most cases, an invoice is payable within 180 days.

Factoring companies favor invoices that are newer and have lengthy shelf-life compared to those who are delinquent

4# The Length of the Agreement

The length of the contract or agreement is essential for the business. Whether the account receivable agreement will stay for months, and several years will affect the company. So, make sure that you’re aware of the length of the contract, regardless if this is a short-term or long-term commitment would be crucial for your business

5# Reserve Accounts, Full Recourse, and Reserve Amounts

Other account receivable financing may consist of a full recourse clause. Under this kind of financing, the lender can encourage the business to pay for any invoices that are uncollectible for a specific period only.

Some agreements will enable the factoring companies to get a percentage of the paid invoice and locate it in the reserve account. The reserved account will aid in replacing any uncollectible invoices.

Some contracts and agreements in account receivable financing may consist of a reserve amount clauses. This kind of clause enables factoring companies to withhold some of the funds until a business paid their invoices.

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Receivable Financing

Author: Cathy Carter