accounts receivable loan

Circumstances Which Lead You To Opt For An Account Receivable Loan

Accounts receivable loan is one of those loans that has only recently come to the knowledge of the general people. It has become so popular that most businesses, for one reason or the other, are opting for these kinds of loans.

Most people do not know the actual mechanics of these loans. What do they mean? What are the benefits of securing these loans? And what are the circumstances that lead to business opting for them?

Accounts Receivable Loans Defined

In simple words, accounts receivable loans involve securing cash against your unpaid invoices. For further simplicity, it can also be assumed that the business sells its unpaid invoices to a company at a discounted price. The purchasing company not only gets holds of the invoices; it also implies the risks associated with them. For this service, the discounting company will also charge an agreed fee.

An account receivable loan is beneficial for any business whose cash is tied up with non-paying customers. However, you must keep in mind that an account receivable loan is comparatively costlier than a traditional loan because it involves a discount as well as a fee.

Circumstances that lead you to opt for an account receivable loan

As account receivable loans are becoming more popular these days, some conditions may compel you to opt for such loans. The article below will discuss some of those circumstances.

Urgent and immediate need for cash

There are times when a business would need quick cash. There could be any reason for this urgency but, regardless of the reason, the owner knows that getting hold of money is a make or break situation for him. The owner knows that if he applies for a traditional bank loan, it will take more than 15 days to process his credit. Actual disbursement will take even more time, and it will be too late. Whenever a situation like this arises, the account receivable loan becomes the most preferred option. Companies dealing in this loan are comparatively faster. They would not take more than two working days for processing and disbursing your loan amount.

Widening gap in business cash flows

Business owners are terrified of such circumstances, where one or more invoices raised by their company on its customers remain unpaid for more than a reasonable period, it can completely ruin your cash flows. The whole business cycle of an entity runs on its cash flows. The business needs money to pay for raw material, transportation, advertisement, marketing, salaries, and other expenses, etc.

When your business cash is stuck up with your customers, you will have no money to pay for operational expenses. When such a circumstance arises, it is the best time to opt for an account receivable loan.

When you have no collateral

People think that banks and financial institutions are the most viable options for securing loans. However, they do not take into account the fact that these organizations would require you to put up collateral to secure the loans.

The value of the collateral must be more than the amount of loan secured to secure the accrued interest payment as well. It means that if you do not have a guarantee, you may not be able to secure a loan from banks and FIs. It is where account receivable loans become very helpful. The company that is discounting your invoices will not need you to put up collateral.

Having a bad credit score

Banks and financial institutions do not entertain prospective borrowers who have a bad credit score. These organizations are highly efficient with clearly and meticulously defined standard operating procedures for loan approvals and disbursements.

A bad credit score does not fit into their risk matrix; that is why they deny any application that comes with a bad credit score. In such a situation, an account receivable loan becomes a feasible option because companies dealing in these loans do not pay much heed to the credit score of the borrower.

When You need a timely and hassle-free loan

As discussed above, banks and FIs have SOPs that follow the loan applicant’s credit analysis. Apart from being a time-taking process, it also offers much hassle for the borrower. The bank official may call you several times during this process to clarify one aspect or the other. You may also be required to collect, copy, and submit a lot of paperwork along with your loan application. You may also have to appear for a personal interview with the approving authority. At times, the procedure becomes very hectic and lengthy.

The Final Word.

An account receivable loan is one of the many loans available to business owners. There are numerous advantages to securing this loan. If you are facing cash flow problems due to the non-payment of your invoices by customers, you may find out that an account receivable loan is the best option available to you.

Non paying customers will continue to pose problems for you in the future, so you must make sure that you do not work with these customers in the future to save yourself from facing cash flow problems in the future.

Image Source:

More from the Author