Accounts Receivable are considered as company’s assets or capital entitled from debtors. They are considered to be one of the ‘most’ liquid assets. Accounts Receivable Financing and Factoring are two different terms that are considered to be same.
- Accounts Receivable Financing is when receivables are used to obtain the loan as a security.
- Factoring is when you sell your accounts receivables to a third party.
Both are used to obtain money, however, the way in which receivables are used is completely different.
Loans from banks is a least expensive source of getting funds but it is also the difficult one.
- If the loan is sanctioned, you can proceed with your business venture without any other source of funding.
- When a loan is not sanctioned, then look for other alternatives like angel investors or venture capitalists, from friends and relatives.
Accounts Receivable financing is many times considered to be a stand alone.
- That is they are not just used to obtain bank loans but they are used to increase the cash flow.
- They are used to act as collateral in any financial deal. It generally happens when customers ask for longer time to pay.
To prevent it, you enter into a financial agreement which gives you advance money, hence stabilizing your cash flow. This method can also help you increase your cash flow. It can be done by giving discounts on early payments and using other similar tactics.
Apart from this, accounts receivables can help you raise bank loans. You can simply apply for a bank loan, as a security/guarantee you show your accounts receivables. A meeting is done, where your credibility is verified. As they say, Banks give you money when you show them that you don’t need any. After satisfaction of the banker and complete verification, your loan is sanctioned. This type of financing is generally used when;
- The company is in immediate need of money.
- Cash flow statements are at high risk. Or falling down continuously with no improvement in sight.
- A bank loan is required and unsecured credit is not available.
- A customer, major one at that, slows down his payment.
- Short-term money is required for expansion.
Accounts Receivable Financing is performed on
When customers are notified that company has issued a loan on the accounts they are entitled to pay. It generally leads to direct payment of your customer to your lender.
When customers have no idea of the loan you have taken. They as usual pay to the company. The company, then forward the received money to their lenders.
From the above information, we can conclude that accounts receivable financing is one of the best ways in order to receive a loan from the bank. In such case scenario, raising loans for companies can be a big challenge.
To overcome this, you can very well take the advantage of your accounts receivable in other words advantage of your fastest liquid assets. We, at LegalRaasta, can help you with any kind of company registration and further queries you may have.