A business’ receivables are an asset. Using the value of accounts receivable to get financing may be a good option over other lending options. Here are some things that business owners should consider about accounts receivable financing.
Offering Receivables as Collateral
A business that has not been operating for very long might still be working on building credit, and it is common for new enterprises to struggle with credit as they get through growing pains. Understandably, lenders and creditors may view them as high risk. A business may need to have some collateral to qualify for a loan. By offering collateral as security, an applicant for a loan or financing poses less risk to prospective creditors.
A business’ accounts receivable can serve as collateral. Business owners may prefer using this form over other assets. A creditor could capture the collateral if a company cannot make the payments that it agreed to. With accounts receivable financing, businesses can mitigate financing risks because they can count on keeping the assets that they rely on in their day-to-day operations.
A business can sell its receivables to a financier or factoring company. In this type of agreement, they relinquish their interest in their receivables in exchange for a fixed amount, which may be a percentage of the receivables’ value.
The drawback of this model is that businesses typically have to forfeit some of the value of their receivables. For a sale to be profitable to lenders, the amount that they pay for the income that a business generates will be less than the total value of that income.
An advantage of selling receivables is that it enables businesses to access capital immediately instead of waiting to collect payment. In addition, they may be able to assign their interest in a way that puts the burden of collection on the assignee. Not having to pursue customers for payment means less work for a company’s accounts receivable manager.
Analyzing the Value of Accounts Receivable
Lenders that offer accounts receivable financing and factoring companies that buy receivables consider more than just the dollar amount in their valuations. For the most part, they want new receivables. Long overdue receivables could be harder to collect. The number of sources for receivables could also impact values.
Ultimately, businesses need to pursue financing options discerningly. Harnessing accounts receivables for financing can help businesses advance their operations while also taking measures to avoid overextending themselves.