Account receivable financing is beneficial to all
Posted by MJim. on May 5th, 2017
All the business enterprises have one thing in common. They face working capital crunches frequently. Naturally, they have the banks to finance these requirements. The major aspects of working capital finance are the raw materials, finished goods, account receivables, etc. The banks have different ratios to finance each category of working capital. The accounts receivable factoring is one the safest methods of financing because the finance takes place after the execution of the contract. More than your credit rating, the credit rating of your client becomes important here. This is why the banks as well as the factoring companies offering such facilities insist on the credit ratings of your clients.
We shall look into the concepts of accounts receivable financing and see the advantages in this facility. Normally, on the execution of the contract or the delivery of the merchandize, the business enterprises raise bills and invoices for payment. The clients honor these bills by accepting the same for payment. The market compulsions entail that you give a credit period for the realization of these bills. Until the time you realize these bills, you account for them as account receivables. Banks finance such account receivables by stipulating a certain limit known as the margin. Depending on the credit worthiness of your client, the margin could range from 25% to 50%. In effect, you get a limit based on the level of your projected accounts receivables for the future.
The banks do not finance the account receivables that are more than 90 days. This is the universal norm all over the world. The banks as well as the factoring companies consider such accounts as doubtful for payment if the bill remains unpaid for more than 90 days.
The business enterprises enjoy certain advantages of this king of financing. They get the realization of the bills in advance thereby freeing up their working capital. They can proceed to the next working capital cycle without having to worry too much about realization of the bills and account receivables. The factoring companies that cater to such accounts receivable factoring have the responsibility of following up with the company for payment. Once they receive the payment, they recover their charges and credit the balance amount to your account. Thus, you get access to these funds in advance by paying a small fee.
In case of reputed companies, the margin amount can go less than 25% as well. The factoring companies can offer you a higher stake whereas the banks usually do not go below 25%. This facility can encourage the business enterprise to take up such jobs in the future if they are secure in the knowledge that they would receive the payments on time. The factoring companies gain as well because they will be financing against genuine bills and invoices. Usually, they also cater to freight financing as well. The responsibility of your client lies in making the payment to the factoring company on the due date. There should not be any problem for them as they would have paid you as well on the same date.