The mere mention of the term accounts receivable loan is enough to make manybusiness owners edgy and uneasy, especially given the fact that conventional business wisdom is such that any self-respecting business owner with some degree of common sense should refrain from using loans as best as they can.
However, the simple truth of the matter is that accounts receivable loan is not a loan in the traditional sense for a variety of different reasons.
In the first instance, an accounts receivable loan will not require the client company, i.
e.
the business that happens to be the recipient of the money to actually pay back the money.
In addition, there is no interest rate levied on the money give to the client company by the company that issued the accounts receivable loan.
The reason that there is some degree of doubt about this very issue is due to the fact that some types of factoring agency will offer a recourse based factoring service.
With this form of factoring, the factoring company will require that the client company returns the money that they were given, in the event that the client who owed the money on the invoice in question, does not pay at all.
However, this is much more close to a refund than the repayment of capital and the reason that a accounts receivable loan is classed as a refund of the capital provided rather than the repayment of a loan is down to the fact that there is no interest required.
In addition, the client company will be under no obligation whatsoever to actually provide the factoring agency will collateral in order to secure the money that they provide.
Indeed, the mere fact that the risk of bad debt will lie with the client company as opposed to solely with the factoring agency is routinely taken to be the collateral.
Another important distinction that must be clearly identified and explained is that all loans will require by necessity, that the credit rating/history of the applicant borrower is checked and verified and this is used to determine the probability that they will repay the money borrowed back, as well as the interest they can afford.
With a accounts receivable loan, the credit rating is utterly irrelevant and immaterial to the provision of the loan.
Now that we have actually considered in more depth, what the precise nature and effects of a accounts receivable loan happen to be, what exactly are the benefits that it will provide the client company and its business owner? Indeed, why would a company even want to pursue and acquire this type of business financing? The factoring agency is fully and utterly responsible for the collection of the money that the customer owes and so the client company need not concern themselves with these concerns.
Because of this, this means that a substantial amount of time as well as money can be saved by delegating the collection process in this manner.