Accounts Receivable Have Many Uses
Using accounts receivable or invoices as collateral to gain working capital from a financial institution is called accounts receivable financing
. 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. Lending institutions will also use the term factoring when referring to accounts receivable financing options. When a small business needs working capital to purchase materials and pay pending bills and have operating funds are limited, small business factoring is an alternative lending solution.When a business requests a small business factoring loan, it turns over its outstanding invoices to the factoring company in exchange for advance funds. The factoring company then becomes the recipient of the outstanding invoices which repay the advance. 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. Small businesses have used factoring as a financial solution, in a tightening credit environment, as a source of working capital while waiting for invoices to be paid. Accounts receivable aging is a report issued periodically that outlines receivable balances and is often broken down by customer account and date due. Accounts receivable aging is a valuable report that can help a company monitor its receivables, which can aid in structuring the company's 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. Investors and alternative financing institutions will purchase debt portfolios for sale from the original debt holding institutions. Lending institutions commonly sell debt portfolios to other lending institutions.When one company??s existing loans are sold to another company, the original loan holder has more capital to make new loans. Once the debt is sold, the borrower??s remaining principal and interest payments go to the new owner of the debt.
Accounts Receivable Have Many Uses
By: Greg Prather
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