Accounts Receivable Financing

Capital is essential to a business's growth. Without this resource, it may be an uphill battle, even for the company to survive. Conversely, India's financial marketplace has evolved into a position wherein it can aid entrepreneurs with a capital injection with an abundance of funding options. An entrepreneur can opt for a particular financing method depending on the business’s unique requirements. One of the growing preferences for short term loans is "Accounts Receivable Funding."

Table Of Contents :

1) What is Accounts Receivable Financing?

2) What are the 3 Primary Types of Accounts Receivables Financing?

3) How Does It Work?

4) FAQs on Account Receivable Financing

What is Accounts Receivable Financing?

Also known as accounts receivable funding, this is a type of funding wherein capital can be obtained by leveraging a company's outstanding invoices. An accounts receivable loan is a short term financing option where the tenure is generally between 30 – 90 days. 

Since they are considered liquid assets, the value of an unpaid invoice translates to its theoretical value to investors. Nevertheless, many companies perceive them to be a liability as collections can be made only in the future. However, modern-day financing flips the script by allowing businesses to utilise unpaid invoices as an asset that can truly help in business growth and expansion.

What are the 3 Primary Types of Accounts Receivables Financing?

The three primary types of accounts receivables financing are:-

  • Traditional Factoring – This is a type of accounts receivable loan wherein a business turns over unpaid invoices to a factoring company. The business gets 70 – 90% of the accounts receivable, which the factoring company itself collects from the vendor. The factoring company pays the business after deducting a certain fee. 
  • Selective Receivables Financing – In this type of accounts receivable financing, the funding company allows a business to choose which invoice to present for funding. The rate of interest is generally lower than alternative options.
  • Asset-based Lending – This is a process where accounts receivable funding companies provide a line of credit to businesses against equipment, property, or inventory. This funding is relatively easy as it involves assets as collateral.

How Does It Work?

It is generally a 6 step process, as demonstrated below.

  • Account setup and due diligence – Due diligence allows accounts receivable funding companies to determine if a business is eligible for making use of the service. A company buying accounts receivable typically has a stringent approval process. They scrutinise a business on the credit quality of clients, ageing reports of the receivables, corporate payment taxes, etc.
  • Getting invoices ready – Once the account is set up, a business has to select the vendor and receivables that will be financed. The invoice is then submitted through a secure website along with the required documentation.
  • Verification – The account receivable funding company verifies the invoice, ascertaining the accuracy of the details, and that they are in fact due within tenure specified.
  • Buying accounts receivable – The funding company then purchases part of the account receivable depending. The time to disburse the amount varies from companies. KerdX disburses the amount within 72 hours of approval.
  • Settlement – Within 30 – 90 days of disbursal, the vendor will make payments directly to the financing company. They will then pay the business after deducting the stipulated fees.
  • On-going cycle – For most businesses, this is an on-going cycle as a regular capital injection is required for the smooth operation of a business.

FAQs

A. Since money is due to come into the business, it is considered an asset. Therefore, it is a debit transaction in the book of accounts.

A. Accounts receivable is the money that is owed to a company by its clients. While accounts payable represents the money that is owed by the company to a business or individual. The former is an asset while the latter is recorded as a liability.

A. Since it denotes a future income of cash, accounts receivable is an asset to the company. It is listed as a current asset in the balance sheet as it can generally be converted to cash.

A. Any asset that cannot be readily converted to cash is called a non-cash asset. Therefore, accounts receivable is one such asset.

A. Although it is considered as an asset and not revenue, in accrual accounting, revenue is recorded at the same time due invoices are recorded.

A. It refers to an accounting tool used to appraise the accounts receivable of a business and recognise any irregularities. The ageing method classifies unpaid invoices based on the duration an invoice has been overdue. This method also allows accounts receivable funding companies to determine which vendor to follow-up with and send collections to first.

A. Applying for this type of funding on KredX is a quick and hassle-free process. Upload your invoice on our platform, and post KredX's evaluation, one or more investors will choose to fund your due invoices. Subsequently, the funds will be disbursed in 24-72 hours*. Furthermore, KredX also has one of the best accounts receivable finance rates in the market.

A. All businesses that provide services to blue-chip companies in India can take advantage of KredX's services. Yet, the eligibility criteria and amount that must be deducted will be measured according to the company's creditworthiness. Hence, the company's financial information and other correlated documentation will have to be provided.

A. Yes! KredX doesn't require a business to put forth any collateral. Simply upload all the necessary documents onto our platform and the funds will be disbursed within 72 hours upon approval.

A. Currently, the maximum tenure for an accounts receivable loan is 90 days as we deliver short-term investment services to our investors.

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