FREE online courses on How to Manage Cash Flow - Chapter 3 - Receivable
Financing
In addition to bank
financing, you can borrow against your assets from a financing company. Accounts
Receivable is a liquid asset that provides a form of financing. In order to
borrow against your accounts receivable, you must meet the following criteria:
1.
Receivables are
related to the sale of merchandise and not services.
2.
Receivable
customers are financially sound and there is a high probability of payment.
3.
Receivable
customers obtain title to merchandise when it is shipped.
4.
Your overall
receivable balance is at least $ 50,000 with sales that are substantially higher
than your receivable balance.
There are two forms of
receivable financing, factoring and assignments.
Under this form of
financing, you sell your receivables to the financing company. You receive the
face value of the receivable less a commission charge. The financing company
assumes responsibility for collecting the receivable. Factoring gives you
immediate cash and freedom from collecting from customers. However, it is costly
and it sometimes confuses customers since they now make payment to a financing
company.
Under this arrangement,
you transfer or assign your receivables over to the financing company. However,
you still retain ownership of the receivables. The financing company advances
60% to 80% of the receivable balance. You continue to collect the receivables
and the financing company charges you interest and service fees on the borrowed
funds.
