Accounts receivable financing offers companies a way to obtain funds during a difficult situation or to fund a project with the potential for high returns. There are two options: using average monthly income as the basis for a loan or factoring, where the lender takes control of receiving payments and provides periodic reports. The debtor cannot be released until the terms are fully settled.
From time to time, companies may need a source of revenue to get through a difficult situation or fund a project that is expected to pay big dividends. When this type of situation occurs, there is the option of accounts receivable financing as a way to continue operations and resolve the issues that created the temporary crisis.
There are two distinct alternatives when it comes to accounts receivable financing. Lenders may use the average monthly income from accounts receivable as the basis for making a loan. The loan amount will take into account the average maturity of account borrowers, the consistency of monthly billed income generated by customer accounts, and the usual amount of payments received each month.
Along with the total loan amount, these factors will also be used to determine the amount of monthly loan payments. With this alternative, the company maintains full control of its receivables and is responsible for managing collections, posting payments and all the usual accounting functions. This is usually a viable alternative for a corporation that is experiencing a short-term cash crunch for some reason and needs funds to get it through six months to a year.
For companies that are trying to regroup after some type of major crisis, such as using funds to fight an attempted takeover, the concept of factoring as a means of financing accounts receivable is common practice. Lenders that specialize in this form of accounts receivable financing generally charge a flat fee per billing period, plus a fixed percentage of the total billed revenue for the period. In return, they factor the total billed revenue minus their percentage and advance that amount to the company.
With this type of arrangement, the creditor takes control of receiving all payments for invoices issued by the company, takes over the collection process, and provides the company with periodic reports on payments received. This allows the company to still record payments in its billing system so that there is an accurate record of what is paid and what is outstanding.
Typically, the account debtor cannot be released from an accounts receivable financing agreement until the terms are fully settled. While the accounts receivable financing loan form has an obvious end point when the loan is paid off, the factoring type of accounts receivable financing can be more difficult to organize. Working with the factoring creditor to determine when the last batch of invoices will be factored and making arrangements to pay any outstanding factored invoices will keep the process orderly so that customers are not confused about where to remit payments.
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