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
. An alternative to conventional loans that allows businesses to leverage their incoming invoices to obtain financing during hiccups in business operations is referred to as accounts receivable financing. Accounts receivable financing is also referred to as factoring by lending institutions.Small business factoring is a common lending alternative for businesses in need of working capital when they are operating with limited funds and need an advance to purchase materials or pay invoices they owe. A factoring company accepts the unpaid invoices of the business getting the small business factoring loan. The advance is repaid by the invoice payments going 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. 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.
A periodic summary of receivable balances, usually categorized by account and date due, is called an Accounts Receivable Aging Report. When structuring the companys operating budget, the receivables monitoring information in the Accounts Receivable Aging Report can be a valuable aid. Accounts Receivable Aging Reports enable a company to examine when payments are received by customers and how much money is needed to operate the business. This allows them to better plan for their cash flow needs.
Investors and alternative financing institutions will purchase debt portfolios for sale from the original debt holding institutions. Debt portfolio sales to other lending institutions is a common practice. Existing loans held by a lending company can be sold to another lender in order to create capital for new loans.The buyer of the debt will then collect the remaining balance and interest from the borrower.
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