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What is Accounts Receivable Financing?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 02 November 2016
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    Conjecture Corporation
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From time to time, companies may need a revenue source to get through a rough spot, or to finance a project that is expected to yield large dividends. When these type of situations arise, there is the option of accounts receivable financing as a way to continue operations while resolving the issues that created the temporary crunch.

There are two distinct alternatives when it comes to accounts receivable financing. Lenders may use the average monthly accounts receivable revenue as the basis for extending a loan. The amount of the loan will take into amount the average aging of the account debtors, consistency of the monthly billed revenue generated by customer accounts, and the usual amount of payments received per month.

Along with the total amount of the loan, these factors will also be used to determine the amount of the monthly payments on the loan. With this alternative, the company retains all control of its receivables and is responsible for handling collections, posting payments, and all the usual accounting functions. Generally, this is a workable alternative for a corporation that is in a short-term money crunch for some reason, and needs funds to get through six months to a year.

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For companies that are attempting to regroup after some sort of major crisis, such as using up resources to fight off a takeover attempt, the concept of factoring as a means of accounts receivable financing is a common practice. Lenders who specialize in this form of accounts receivable financing usually charge a flat fee per billing period, plus a fixed percentage of the total billed revenue for the period. In exchange, they factor the total billed revenue, less their percentage, and advance that amount to the company.

With this sort of arrangement, the lender assumes control of receiving all payments on the invoices issued by the company, takes over the collection process, and supplies the company with periodic reports on payments received. This allows the company to still post payments in their billing system, so 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 arrangement until the terms are completely settled. While the loan form of accounts receivable financing has an obvious end point when the loan is paid off, the factoring type of accounts receivable financing may be more difficult to arrange. Working with the factoring lender to determine when the last batch of invoices will be factored and making arrangements to pay off any outstanding invoices that were factored will keep the process ordered, so customers are not confused about where to remit payments.

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