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An accounts receivable loan is a type of lending arrangement that allows a company to use the accounts receivables for a specific period as the collateral on a loan. This type of loan may be on a one-time basis, or may continue over successive billing periods, effectively allowing the company to make use of the receivables before they are actually remitted by customers. Typically, the lender is compensated either by the interest that is assessed on the balance of the loan or by retaining a fixed percentage of the total value of the receivables for each period held as collateral.
One type of accounts receivable loan is a secured loan arrangement that is offered by banks and similar financial institutions. Sometimes known as a receivables business loan, this arrangement is very similar to any type of secured loan. The lender will consider the total amount billed during the current accounting period, then approve a loan for a percentage of that amount, usually somewhere between 70% and 80% of the face value of the invoices generated for that billing period. The receivables 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 business to use those funds to settle the debt with the lender by making the scheduled monthly installment payments.
A different type of accounts receivable loan is used when there is a need to continually arrange financing using receivables generated in successive periods. Known as factoring, this approach essentially calls for a factoring company to assess the receivables for each period and extend a lump sum payment that may be anywhere between 70% and 90% of the total value of the invoices involved. Unlike an accounts receivable loan secured from a bank, a factoring loan typically requires a chance in the remit to address on those invoices, often to a lockbox owned and operated by the factoring company. As payments are received, they are credited to the borrower’s account until the lump sum is retired. At that point, the factoring company will issue a payment to the borrower that covers the remainder of the face value of the collected invoices, less a small percentage for providing the financing.
Depending on the needs of the company, either approach to an accounts receivable loan may be appropriate. When the need is short-term, obtaining this type of loan from a bank and using the receivables as collateral is often a good move, since it means that customers do not have to change anything in order to remit payments. In situations that require ongoing financing, working with a factoring company is often the best approach.