We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.
Finance

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

What is Accounts Receivable Financing?

Malcolm Tatum
By
Updated: May 17, 2024
Views: 7,184
Share

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.

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.

Share
WiseGeek is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Malcolm Tatum
By Malcolm Tatum
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing to become a full-time freelance writer. He has contributed articles to a variety of print and online publications, including WiseGeek, and his work has also been featured in poetry collections, devotional anthologies, and newspapers. When not writing, Malcolm enjoys collecting vinyl records, following minor league baseball, and cycling.

Editors' Picks

Discussion Comments
Malcolm Tatum
Malcolm Tatum
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing...
Learn more
Share
https://www.wisegeek.net/what-is-accounts-receivable-financing.htm
Copy this link
WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.

WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.