Loans Receivable
The FAQ of Accounts-receivable financing for small businesses.
Most small businesses face a difficulty to maintain a leveled cash flow throughout the year. This is one of the major problems, which is faced by nearly all small scale businesses. And on most occasions it may not be possible for them to get a small loan to keep up with the cash flow requirements.
That is when you need to go a bit smart and use your non-performing accounts receivable to generate cash for any sudden requirements. This concept that we are talking about is often referred to as factoring, and is also looked upon as selling off your accounts receivable. But we must make it clear that accounts receivable financing is neither factoring nor selling of accounts loans receivable.
In accounts receivable financing you are getting a loan for which your account receivables serve as a security or collateral for the amount of money that you borrow. This article is framed around some of the most frequently asked questions related to loans receivable financing.
Q: What differentiates accounts receivable financing from asset based lending
A: Accounts receivable financing can be clearly understood as being a different form of asset based lending. In asset base lending the businesses use the accounts receivable, stock inventories and equipments to serve as the collateral for the loan amount. And in Accounts-receivable financing the money is granted against the loans receivable only which serve as the security.
Both these finance types are available through independent investors and banks.
Q: What types of users typically require accounts receivable financing
A: Any kind of a small business or even large businesses, at times, may use accounts receivable financing in the following circumstances:
* The business is undercapitalized that is it is falling short of the basic capital required to keep the business running.
* A business that is going through a financial trouble due to certain things like losses, delay in production, no funds to pay their employees, they are all ready into excessive depths so they could not take loans from outside and so on.
* If the company is growing at a very fast rate and is unable to meet up with the money required for this growth.
* The company may be new in the business and thus not be eligible to take massive bank loans.
Q: How is it different from factoring?
A: In factoring the business is selling over its accounts receivable for a price which is somewhat lower than the total amount of receivables. This margin is kept by the lender to cover the risk involved in case the consumers dont end up paying. Once the accounts are sold over it is the lending institution's problem to collect money for all the accounts receivable. But as far as accounts loans receivable financing is concerned, the business is taking a loan against the accounts receivable and so he does not have to pay any kind of margin to the lending institution also the business will have to get the receivable accounts collected all on its own.
Q: Who should avoid using Accounts-receivable financing?
A: If the business is capable of qualifying for bank finance they should probably decide against the accounts loans receivable financing. As it is a common practice that such businesses may take an accounts receivable financing and when their situation improves they move back to the bank financing. Also, only those businesses which have a heavy amount of accounts receivable and have no other option of generating short term finance should consider accounts receivable financing.
Q: What are the costs involved in accounts receivable financing?
A: The costs are determined on the basis of the amount of receivables. The interest rates would vary something like the prime rate plus around one to three percent on the daily average of the loan balance. So you can expect something like eleven percent to 25 percent interest charges, though the exact percentage will depend on the amount of risk involved with the borrower.
Apart from the interest rate the business should also give a thought to the fees that is applicable. The standard practice in the industry is to charge a one percent of the loan amount as the loan fees, and an administrative fee which is calculated at 0.1 to 0.5 percent on a monthly basis.
You can find out the exact amount of fees that will be applicable on your account receivable financing, and if it seems to be too high you may want to consider other alternatives of getting finance.
Q: Why do small businesses land up in financial trouble?
A: There could be numerous reasons as to why a business lands up in financial trouble like:
* During periods of recession.
* Decline in the sales of the company.
* Improper collection policies for outstanding bills.
* The profits may have been used fully for some other purpose. Etc.
Q: What qualities to look for in an accounts receivable lender
A: Before you move on to get your accounts receivable loan processed through a specific lender you need to inquire a lot many things about him and his policies.
You also need to inquire about the reputation of the lender along with a deep study of the terms and conditions that he presents for the loan. Compare the costs and the fees that are being charged by different lenders so as to make it the most profitable deal for your business. A good lender will also be a member with the local or the national trade association, find about this aspect as well.
There are lenders out there who would even help you to improve your business so that they can ensure the safety of their money. They may even help you find out why this financial crisis came up and how can it be sorted out.
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