Accounts Receivable Financing

Accounts Receivable Financing

Accounts Receivable Financing is a secured loan where accounts receivable are used as collateral. The loan is repaid in a specified time frame as the receivables are collected. This is most often used by businesses facing short-term cash flow problems. The biggest source of accounts receivable financing for small businesses are commercial finance companies. Banks will consider receivables as security for a business loan, but don’t typically do so.

Accounts receivable are almost always "aged" by the borrower. The older the account, the less valuable it is. Financiers will usually loan roughly 75 percent of the face value of accounts less than 30 days old. Some lenders don't pay attention to the age of the accounts unless they are over 90 days. After the accounts are over 90 days, lenders typically refuse to offer financing. Some lenders will apply a graduated scale to the value of the accounts. For instance, accounts that are from 31-60 days old may have a loan-to-value ratio of 60 percent, and accounts from 61-90 days old are only 30 percent.

Be aware that some states require that you send notice to the business's debtors that their debt has been pledged as loan security. In states that do not have this requirement, most businesses do not notify their customers. They feel that the debtor might perceive this method of financing as a sign of instability.

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