Concepts and implementations of accounts receivable financing

The term accounts receivable financing is one of the most widely used terms in the study and implementation of finance, be it a beginner's level or the top management level. It can be defined as a certain type of financing arrangement where the company or the organization uses the receivables, which is actually the money owed by customers, as a collateral in a financing agreement. Generally, the amount that the company receives is equal to the value of the receivables that are pledged. This concept or fundamental is also termed as "factoring".

Accounts receivable financing basically assists the companies to free up their capital stuck in accounts receivables. The default risk that is associated with the accounts receivables to the financing company is transferred through account receivables financing. In AR financing, the businesses normally sells the invoices to a third party commercial financial company. In such cases, the businesses receive cash more quickly instead of waiting 30 to 60 days for a customer payment.

Different industries and financial service providers have different terms of nature that are sorted and decided before hand only, mostly at the times of their inception. Many companies purchase the invoices and advance the money within 24 hours. However, the advance rate may vary from 80% to 95% depending on the industry standards, the customer's credit history and other criteria. The factor also provides the back office support. The major benefit of AR financing is that the cash is received soon and the financial stability is provided instead of waiting for a couple of months to obtain the customer's payment.

One more term for the same is accounts receivable loans, which actually is not a loan. Factoring, in case of funds, is unrestricted which lends the company more flexibility as compared to a traditional bank loan. There are numerous advantages of factoring. They key advantage is that it boosts the cash flow to a considerable amount, which helps solve short-term cash flow issues and helps refueling the business. Accounts receivable loans or factoring companies handles the customer's collections and also evaluates the customers' credit and payment histories. It is important to note that unlike a conventional loan, there is no limit in factoring regarding the amount of financing. It goes well in sync with the small scale or start-up businesses which are in immediate requirement of constant cash flow in their growing stages.

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