There is a reason why accounts receivable financing is a four-thousand-year-old financing technique: it works. Accounts receivable financing, factoring, and asset-based financing all mean the same thing related to asset-based lending- invoices are sold or pledged to a third party, usually a commercial finance company (sometimes a bank) to accelerate cash flow—my Latest News.
In simple terms, the process follows these steps. A business sells and delivers a product or service to another company. The customer receives an invoice. The company requests funding from the financing entity, and a percentage of the invoice (usually 80% to 90%) is transferred to the company by the financing entity. The customer pays the invoice directly to the financing entity. The agreed-upon fees are deducted, and the remainder is rebated to the business by the financing entity.
How does the customer know to pay the financing entity instead of the business they receive goods or services from? The legal term is called “notification.” The financing entity informs the customer in writing the financing agreement, and the customer must agree to this arrangement. If the customer refuses to compromise in writing to pay the lender instead of the business providing the goods or services, the financing entity will decline to advance funds.
Why? The main security for repaying the financing entity is the customer’s creditworthiness in paying the invoice. Before funds are advanced to the business, there is a second step called “verification.” The finance entity verifies with the customer that the goods have been received or the services were performed satisfactorily. Without dispute, it is reasonable for the financing entity to assume that the invoice will be paid; therefore, funds are advanced. This is a general view of how the accounts receivable financing process works.
Non-notification accounts receivable financing is confidential factoring where the customers are not notified of the business’ financing arrangement with the financing entity. One typical situation involves a company that sells inexpensive items to thousands of customers; the cost of notification and verification is high compared to the risk of nonpayment by an individual customer. It may not make economic sense for the financing entity to have several employees contacting hundreds of customers for one financing customer’s daily transactions.
Non-notification factoring may require additional collateral requirements such as real estate; the borrowing business’s superior credit may also be required with personal guarantees from the owners. It is more difficult to obtain non-notification factoring than normal accounts receivable financing with notification and verification provisions.
Some businesses worry that if their customers learn that a commercial financing entity is factoring their receivables, it may hurt their relationship with their customers; they may lose their business. What is this worry, why does it exist, and is it justified?
The MSN Encarta Dictionary defines the word worry as:
Verb (past and past participle worried, present participle worrying, 3rd person present singular worries)Definition:
The transitive and intransitive verbs be or make anxious: to feel nervous about something unpleasant that may have happened or may happen or make somebody do this
Transitive verb annoy somebody: to annoy somebody by making insistent demands or complaints
Transitive verb try to bite animal: to try to wound or kill an animal by biting it
a dog suspected of worrying sheep
It is the same as worrying at
Intransitive verb proceed despite problems: to proceed persistently despite problems or obstacles
Transitive verb touch something repeatedly: to touch, move, or interfere with something repeatedly
Stop worrying about that button, or it’ll come off.
Noun (plural worries)Definition:
Anxiousness: a troubled, unsettled feeling
Cause of anxiety: something that causes fear or concern
Period of stress: a period spent feeling anxious or concerned…”
The opposite is:
“Not to worry ” is used to tell somebody that something is not important and need not be a cause of concern (informal)
Not to worry. We’ll do better next time.
No worries, U.K. and Australia New Zealand used to say something is no trouble or is not worth mentioning (informal)”.
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Query: If a business is financing its invoices with accounts receivable financing, is this an indication of financial strength or weakness? Question: From the point of view of the customer, if you are buying goods or services from a business that is factoring in their receivables, should you be concerned? Query: Is there one answer to these questions that fits all situations?
The answer is it’s a paradox. A paradox is a statement, proposition, or situation that seems absurd or contradictory but is or may be true.
Accounts receivable financing is a sign of weakness in cash flow and a symbol of strength concerning cash flow. It is a weakness because, before financing, funds are unavailable to provide cash flow to pay for materials, salaries, etc. It is an indication of strength because, after funding, cash is available to facilitate a business’s need for money to grow. It is a paradox. When properly structured as a financing tool for growth at a reasonable cost, it is a beneficial solution to cash flow shortages.
If your entire business depended on one supplier, and you were notified that your supplier was factoring their receivables, you might have a justifiable concern. If your only supplier went out of business, your business could be severely compromised. But this is also true whether or not the supplier is utilizing accounts receivable financing. It’s a paradox. This involves matters of perception, ego, and character of the business’s personalities and the supplier.
Every day, every month, thousands of customers accept millions of dollars of goods and services in contracts that involve notification, verification, and the factoring of receivables. For most customers, “notification” of accounts receivable financing is a non-issue: it is merely a change of the payee’s name or address on a check. This job is for someone in the accounts payable department to make a minor clerical change. It is a mainstream business practice.