An accounts receivable loan allows businesses to use their accounts receivable as collateral for a loan, either through a secured loan arrangement with a bank or factoring with a factoring company. The lender is compensated through interest or a percentage of the accounts receivable.
An accounts receivable loan is a type of loan agreement that allows a business to use accounts receivable over a specified period as collateral for a loan. This type of loan can be one-time, or it can continue through successive billing periods, allowing the business to draw on receivables before customers send them off. Typically, the lender is compensated either by the interest that is assessed on the loan balance or by retaining a fixed percentage of the total value of the accounts receivable for each period that is held as collateral.
One type of accounts receivable loan is a secured loan arrangement offered by banks and similar financial institutions. Sometimes known as a business receivable loan, this arrangement is very similar to any type of secured loan. The lender will consider the full amount billed during the current accounting period, then approve a loan for a percentage of that amount, typically between 70% and 80% of the face value of invoices generated for that billing period. Accounts receivable are used as collateral for the loan, and the borrower repays the loan according to specific terms, usually within six months or less. With this solution, the borrower’s customers continue to remit payments directly to the company, allowing the company to use those funds to pay off the debt with the lender by making scheduled monthly payments.
A different type of accounts receivable loan is used when there is a need to continuously arrange financing using accounts receivable generated in successive periods. Known as factoring, this approach essentially requires a factoring company to evaluate accounts receivable for each period and extend a lump sum payment that can be anywhere from 70% to 90% of the total value of the invoices involved. Unlike a bank-guaranteed accounts receivable loan, a factoring loan typically requires an opportunity to address those invoices, often to a safe deposit box owned and operated by the factoring company. As payments are received, they are credited to the borrower’s account until the lump sum is withdrawn. At that time, the factoring company will issue a payment to the borrower that covers the remainder of the face value of the collected invoices, minus a small percentage to provide financing.
Depending on the needs of the business, any approach to an accounts receivable loan may be appropriate. When the need is short-term, getting this type of loan from a bank and using accounts receivable as collateral is often a good move, as it means customers don’t have to change anything to remit payments. In situations that require ongoing financing, working with a factoring company is often the best approach.
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