Accounts receivable (AR) financing arrangement involves a corporation obtaining financing capital connected to a part of its accounts receivable. Accounts receivable financing in Alabama can be arranged in various ways, with the most common basis being asset sales or loans.
What Is Accounts Receivable Financing?
In AR financing, a capital principal involves a company’s accounts receivables. AR consists of assets representing the unpaid balances of bills sent to consumers. It is recorded as an asset on a company’s balance sheet, generally a current asset with payment due within a year.
AR is a liquid asset considered upon determining and calculating a company’s quick ratio, which examines its most liquid assets:
Quick Ratio = (Cash Equivalents + Marketable Securities + Accounts Receivable Due within One Year) / Current Liabilities
As a result, accounts receivables are seen as highly liquid assets internally and externally, translating to potential value for lenders and financiers.
Many businesses regard AR as a burden. This is because the assets are anticipated to be paid but must be collected and cannot be converted to cash at once. Due to these liquidity and business challenges, the business of AR financing is fast changing. Furthermore, other lenders have stepped in to fill the gap.
Financial factoring is a term used to describe the process of financing accounts receivables and the organizations that specialize in it. Factoring businesses primarily specialize in AR financing. However, in general, any financial institution can offer accounts receivable factoring.
Financial institutions may be ready to establish accounts receivable financing agreements in various ways under different stipulations.
With the development of new technologies, some allow the integration of business accounts receivable information to finance platforms. In particular, accounts receivable financing is becoming increasingly prevalent.
Moreover, AR finance is often easier for a firm than other capital financing forms. This is especially applicable for small businesses that can readily fulfill AR funding conditions and huge corporations that quickly include technological solutions.
A typical form for AR financing is an asset sale. A corporation sells accounts receivable to a lender under an agreement. This strategy is comparable to banks selling off sections of loans.
Capital is received as a cash asset, which replaces the value of accounts receivable on the balance sheet. Any unfinanced sums may require a write-off, which may vary based on the principle to value ratio settled upon in the agreement.
With asset sales, the lender assumes responsibility for AR bills and collections. If invoices are entirely paid, the lender may offer cash debits retrospectively in specific situations.
Most factoring organizations will focus on buying short-term receivables rather than defaulted receivables. Overall, purchasing assets from a firm passes the risk of default with AR to the finance company, which factoring providers strive to minimize.
Factoring firms profit from the principal-to-value spread in asset sale structure. Factoring providers also charge fees, making factoring more profitable for the financier.
Accounts receivable financing is short-term financing based on a company’s receivables. If ever there is a mismatch in timing between the cash inflows and outflows of the firm, this type of arrangement is valuable.
Porter Capital provides working capital solutions to businesses in a variety of industries. As a direct lender and financial factoring company located in Alabama, Georgia, and Minnesota, we have provided over $6 billion in funding since inception. Apply now!