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Accounts Receivable Financing And How It Can Help You

Accounts receivable financing is a flexible form of short term, asset-based commercial financing. Receivables factoring is a common form of this type of financing. In most cases receivables factoring is structured as a sale transaction. It is not a debt or loan transaction. A trading business sells its accounts receivables amount to factoring or invoice discounter firm. This type of transaction may also be referred to as invoice factoring and is a form of asset securitization.

Ownership of the receivables balance is legally assigned or transferred to the factor firm. The transaction remains confidential. In many jurisdictions, there is no requirement to formally advise the debtors of the transaction.

The sale transaction proceeds at a price discounted below the nominal receivables value recorded in the financial books of the trading business. The trading business selling its receivables receives an immediate payment. That immediate disbursement is only a portion of the total value agreed for the receivables. Further payments will be made by the invoice discounter as the receivables are collected.

The price paid by an invoice discounter to a business for its receivables balance depends on a various factors including the average size of the outstanding invoices owed by debtors, the number of customer debtors, their credit rating or creditworthiness, the average length of the collection period, and the average age of the outstanding invoices (the longer the debt has been outstanding the lower the price paid by the invoice discounter).

Compared to banks, factoring firms focus entirely on one asset (the receivables) rather than the whole business. By contrast, the loan approval process of a bank is totally different. They focus on the overall financial performance and credit history of a business, its cash flow and its available security or collateral. Many small-to-medium, early life cycle firms have difficulty in meeting bank lending criteria. They typically have few assets, a weak balance sheet and a no credit history. Provided they trade and have a reasonably large accounts receivable balance, factoring may be a suitable option.

Factoring firms adopt two alternative approaches to the risk of non-payment by debtors (debtor default). These two approaches are reflected in the transaction structure or documentation. Non-recourse sees the factoring firm take on all non-payment risk and no recourse for compensation from its customer, the trading business. Without appeal factoring involves the opposite situation, all debtor risk is carried by the trading business.

In a factoring context, the efficient collection of outstanding amounts from debtors is a critical task. It is an ongoing concern for the trading business keen to maintain a harmonious relationship with customers. If the trading business sells its receivables on a non-recourse basis, over-aggressive collection tactics by the factor firm may result in the loss of customers. For this reason, a trading business may choose to conduct the transaction without appeal.

Small Business Finance And Small Business Loans

Starting up and running a small business is not something that can be decided on a limb. It takes time to properly draft an effective and practical plan that covers many of the fundamentals such as start-up costs, proposals, and financial exit strategies. However once that is accomplished, the benefits completely outweigh the disadvantages of taking that extra time. The beauty of having a plan is that it can change at any point in time. This is especially important for owners because things change at different points in time particularly where business financing is concerned. One question that comes up very often with small business finance is that of when to start getting a little help from the bank. Here is some general advice on when to consider a loan.

-You Are Increasing

You opened with your product or your service and now you need to buy equipment in order to cope with the demand. You started off and your customer base has grown to the point where you are looking at expanding your building. When you are taking out a loan to help pave the way for greater opportunities, you are making the right decision. Not just because you’re setting yourself up to make more money, but because you’re most likely going to be able to pay it back. This requires a bit of forecasting, but it is certainly more than possible to put together a reasonable strategy.


You’ve outgrown your old building, the income and customers are still steady but its cheaper to just move to a new building, you want to add an extra store. Whatever the reason for changing buildings, the key is that it is because you are growing. If you need a loan to put a down payment down on the new building or something to that effect, it is a good idea for you to at least begin to consider small business loans.

-Upfront Costs Are Required

This does not mean upfront costs in the sense of monthly rent or daily operations- you should never take out a loan for those reasons. However if you are looking at serious renovations or at upgrading your current equipment there are often upfront costs that you may not be able to afford all at once. As long as you are careful with your accounting and you have some idea of what your finances are going to be looking like for the duration of the loan, consult with your financial advisers but don’t hesitate to get a loan if the opportunity is there and the reasoning is sound.

Taking out a loan is a decision that is never taken lightly when it is just individuals involved, but when you are considering small business loans there are good and bad reasons for going through with it. If you are planning to use the money to cover bills and the like, there are more serious problems that need to be addressed. However if you are looking for ways to manage small business finance through loans, some good reasons are if your company is increasing, you are relocating, or if there are upfront costs that will need to be covered. The key is to make sure that you take the money because things are going well. That way you can rest assured that the money will be paid back to the bank.