subject: Using Accounts Receivable As A Business Tool [print this page] Accounts receivable financing is a type of lending in which a company can utilize its accounts receivable, or invoices, as collateral to gain working capital from a financial institution. Accounts receivable financing is an alternative to conventional loans, which allows businesses to capitalize on their incoming invoices and prevents any hiccups in business operations. Factoring, or accounts receivable financing, are two terms that lending institutions use to describe the same financing option.
When a business with limited funding and needing an advance to pay invoices and purchase materials, small business factoring is a lending alternative for obtaining working capital. In the case of small business factoring, a business would ask the factoring company for an advance on funds it has owed to it and turn over the invoices to the factoring company, so the funds would then go directly to the factoring institution. Small businesses that opt for accounts receivable financing may turn over all or a portion of their invoices to factoring companies for an advance on funds to maintain or grow business operations. While waiting for invoices to be paid, many small businesses have turned to factoring as a financial solution for securing working capitalespecially in a tight credit environment.
Accounts receivable aging is a report issued periodically that outlines receivable balances and is often broken down by customer account and date due. The receivables monitoring information supplied by the Accounts Receivable Aging Report is a valuable tool when drawing-up a companys operating budget.A record of when payments are received by customers and how much is needed to operate the business provided by Accounts Receivable Aging Reports; allowing a company to better plan its cash flow needs.
Alternative financing institutions and investors will buy, from the original debt holding financial institution their debt portfolios for sale. The sale of debt portfolios is a common practice among lending institutions. A lending company will sell an existing loan to another company in order for it to have enough capital to create new loans. The remaining balance and interest from the buyer then goes to the debt purchaser.
