In a recent article we discussed invoice factoring as a way to help allay collections woes and quickly obtain operating capital. In certain circumstances, though, factoring may not be an option for businesses that have cash flow issues impacted by slow-paying or no-paying debtors. Another option for cash-strapped businesses is an accounts receivable loan.
An accounts receivable loan is a secured short-term loan taken out in order to obtain working capital, using accounts receivables (i.e., invoices) as collateral. The loan is repaid as the company collects on the past due invoices from their clients. Unlike invoice factoring, the business still owns the invoices and is responsible for collecting on them and then making timely payments. Depending on qualifying factors, a company can borrow between 60% and 80% of its total value.
Qualifying for an accounts receivable loan depends on the ages of the various invoices. The older the invoice, the higher the risk since they are less likely to be repaid. Some lenders will not loan on invoices older than 90 days. Furthermore, a company seeking an accounts receivables loan must be established enough to have accrued a moderate amount of assets in the form of accounts receivable. The company should also know that their clients are likely to pay their invoices. Since accounts receivable loans are best for providing working capital for ordinary business operations, it isn’t recommended for new businesses or for businesses seeking to expand.
Depending on your point of view, accounts receivable loans come with advantages and disadvantages. While one advantage is that you obtain capital to run the day-to-day operation of your business, a major disadvantage is that repayment of the loan includes payment of interest.
Using your invoice assets as collateral to obtain a loan for increasing cash flow comes with financial expense, and can cut into profits. Ultimately you must decide whether such a loan is absolutely necessary. If your company is having trouble collecting from debtors, you may also seek to hire a business debt collection attorney.
The Jayaram Law routinely and successfully assists its clients in their business-to-business (b2b) collection needs. We take pride in obtaining payment on accounts receivables without fracturing critical business relationships or engaging in time-consuming and costly litigation efforts.
If you need business debt collection services conducted in a professional manner, contact our B2B (business-to-business) debt collection law firm by calling 312.454.2859 or visiting www.jayaramlaw.com.