Accounts Receivable Loans

Accounts receivable loans are a standard way that many companies survive the monthly, seasonal or yearly cycle of cash flow problem and go on to have thriving businesses. Surprisingly, companies need not necessarily be profitable, and the owner need not have a six hundred credit score to get accounts receivable loans. In fact, the credit score is not an issue and neither is the profitability; they never come into play when the lender decides or declines to provide the loan. Instead, the type of lender that will provide this money, called a factor, does want to know whether account receivables are coming in each month and what percentage are slow or non pays. Factoring is a well known practice in the business world and is used quite routinely by thousands of companies across the US and around the world.

Let's take a minute and look at a scenario to see how this works. A struggling janitorial service has forty five accounts it services each week. Because these accounts were started at various times of the calendar, there is a natural oasis the third week of each month when only a few receivables come in. At the same time, the janitorial service has supply vendors it must pay immediately in order to maintain a deep discount on the products it uses. The service owner is also desirous of hiring some new staff to open new accounts, but the spotty receivables are keeping that from happening. The factor comes along and gives the service of accounts receivable loans for all the accounts, minus a percentage for its own profit. Cash flow is now like the Colorado River instead of sewer department sludge and the company is off and running.

There are several ways a factor can aid a business. In addition to accounts receivable loans, invoice factoring is possible. Whenever a company produces invoices for services rendered or for products delivered, there is a factor ready to aid with a loan for those statements. While the factoring of receivables is riskier because of late and slow pays, invoice factoring is more secure and thus costs the customer less in profit for the factor's involvement. Then there is credit card factoring, which is important for some businesses because it may take up to ten days or more to get paid by the card's sponsoring bank and factoring can supply the same money, minus a percentage within one or two. Those eight days for some businesses is like a walk across the Sahara.

The advantages of using a factor can be quite attractive for many businesses. There are no start-up fees, no miscellaneous costs, no credit check, no long wait for approval and for many, they may be called accounts receivable loans, but they sure doesn't show up on credit history as one. So there is no owed money hanging over the owner's head. Debt hanging over anyone is oppressive and depressing, but a life of unforgiven sin and the resulting wrath of God directed at that unforgiven sin can be eternally tragic. "For the wages of sin is death, but the gift of God is eternal life through Jesus Christ our Lord." (Romans 6:23)

One of the disadvantages for some business owners in regards to factoring is the fact that an outside stranger suddenly becomes quite cozy with the knowledge of the company's private business. Books are open, all the facts and figures are exposed to someone or company that may not have any particular affinity for the business, and it does become a little unnerving. The success of accounts receivable loans depend on the factor looking at the aging of the AR numbers. In other words, what do these AR accounts look like in terms of how old they are: on time, 30 days, 60 days or even 90 days late? The factor offering the accounts receivable loan will be happy to front the money for accounts paid on time, and maybe even up to thirty days late, but those after that may either be devalued dramatically or declined to leverage all together.

The point about all of this is that the business owner truly does give up a portion of his control of the company to the factor. There is something a mite disconcerting to many owners and there is more disquieting news about the role of the factor. Depending on who the factor is, there may be a demand that in return for his services, the lender of the accounts receivable loans be able to sit on the company's board or receive a portion of the business interest. This can really begin to sound like the camel's nose in the tent thing. Of course, the owner can always say no and the deal goes kaput, but there are other factors out there that may not be so demanding or ambitious.

Lest any mistaken assumptions be made, factoring never provides 100% of the AR money in a accounts receivable loans arrangement. It is usually about 60%-80% of the entire due amount. But this percentage is usually enough for a business to get back on its feet. If you are choosing to go this route, it goes without saying to do plenty of homework ahead of time. Thoroughly vet any candidate being considered for factoring your business. Talk to others who have done this before and ask all, the hard questions. Know the depth of the water before jumping in.