Unfortunately, sales cycles and purchasing cycles don’t always run concurrently. Resellers know this all too well; many times they will need to pay for inventory before they have sold it. If you need a short-term loan to cover you until you can sell your inventory, an accounts receivable loan might be right for you. Learn more about Short-Term Business Loans.
When you receive an accounts receivable loan, the lender uses your company’s accounts receivable as collateral. You then repay the loan as your customers pay their receivables.
There are many benefits of accounts receivable financing. For starters, most lenders do not require a business plan or tax documents to make this type of loan. Also, accounts receivable financing allows businesses to free up capital that is tied up in inventory.
Most companies that offer accounts receivable financing are commercial lenders, not banks. During the loan approval process, the lender will calculate a loan-to-value ratio. Tabulation methods vary from lender to lender; some may refuse to finance accounts that have aged beyond 90 days, or may assign a lower percentage to older accounts. Read more about Using Debt to Finance Your Business.
Interest rates on accounts receivable loans are determined based on a daily percentage rate on outstanding receivables. If a loan goes into default, the lenders may seize the receivables used to secure the loan.
Before you decide to go with an accounts receivable loan, ask yourself if you really need the money. Accounts receivable financing can produce fast cash, but it can also affect your financial future. Make sure you have exhausted your other financing options first.