Accounts Receivable Financing & Accounts Receivable Client

By: Kris Koonar

Growing and emerging companies require immediate capital in order to facilitate their successful ventures. These start up companies often face a deficit of working capital needed for the smooth functioning of their daily operations as most of their capital is blocked in accounts receivables. In layman's terms it means that the growing company performs the service or delivers the product to the client, and then bills them.

However as per business norms the payment is usually held up and cleared after about 30 to 60 days. This held up or to be cleared amount is the accounts receivable of the company rendering a service or selling a product. Since capital is blocked in accounts receivables, these companies have to look for alternative sources to secure continuous cash flow to meet their daily operational needs. Accounts receivable financing is fast emerging as one of the best funding options that emerging companies are choosing to solve their cash deficit problems.

Accounts receivable financing is the process of selling off the accounts receivable bills of the company to an accounts receivable finance company to secure immediate capital. The accounts receivable financing company provides funding to the service or product selling companies against their accounts receivables which act as collaterals. This process is relatively simple, requires no other collaterals and does not take much time for releasing funds.

The financing firm usually disburses the funds a range of up to 60% to 90% of the amount receivable for a fee that could range from 1% to 5% depending upon a certain criteria set by the financing companies for each company they are funding. These companies are the clients for the financing companies. So in case the company wants a funding for their accounts receivables from the accounts receivable financing company certain criteria have to be looked at while approaching them.

Accounts receivable financing companies look at the creditworthiness of the client's debtors. Their debt records and performance records are taken into account. The age of the receivable is a consideration while determining the fundability of the client company, in case the receivable bill is as old as 90 days or more then no accounts receivable financing company will finance it. The client company also will not qualify to secure funds on their accounts receivables, if there is already loan secured on the same accounts receivable from a banking institution, unless the bank is willing to release its security interest on the receivable held by them.

The client company's customer's average repayment cycles, the factoring volume and the size of the invoices are also few more determinants an accounts receivable financing company will take into account while releasing the funds. Based on this, the financing company will give the client company 60% to 95% amount of the total face value of the receivable. The balance amount would be released after the invoice is cleared.

This type of financing can prove advantageous as the service rendering or product selling companies can free up their tied up capital and use it to maximize their growth and concentrate on business development activities rather than worry about collections and rising debts.

Corporate Matters
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