Borrowing On Accounts Receivable
This is perhaps the most common form of secured financing that involves liens against accounts receivables. When you borrow on accounts receivable, you sign a promissory note to the lender at an agreed rate of interest and secure the loan by assigning accounts receivable to the lender on a confidential basis. In this instance confidential means that your customers are not notified of your arrangements with the lender.
In your accounts receivable ledger you will stamp those accounts that have been assigned to indicate that they have been pledged as a security for a loan. All must be first class accounts, none more than 90 days past due from invoice date. You collect from your customers, but you receive payments as a trustee from the lender, and you keep such collections separate from your own assets.
While distinctions are made by the lenders that we have access to, loan advances can usually be obtained amounting to from 75% to 95% of outstanding qualified receivables, the average being 80%. The specific percentage point granted to an applicant is known as the base or discount. When your request has been accepted, an "open limit" account is established in your behalf. This permits the amount of financing to fluctuate as your receivable portfolio grows or declines. Using this plan is similar to having two bank accounts, your regular depository account and liberal lines of credit through our sources.
As you provide services or ship merchandise to your customers as usual, you send the bill of lading together with a carbon copy of the invoice to the lender that has accepted you for this plan. The lender immediately sends you a check up to the base (75%-95%) that has been established for your company, of the net face value of the invoice. You receive the balance (5%-25%) as, and when, you collect the invoice from your customer.
Many types of companies qualify to use this service. Generally, businesses which sell on credit terms and are interested in increasing their sales and profits. However, the prime candidates are small businesses that produce between $15,000 and $500,000 in qualified commercial receivables per month. A commercial receivable is defined as an invoice issued for a product produced or services rendered, for commercial firms, churches, government agencies, schools, universities, and other similar establishments.
As was previously mentioned, all transactions are strictly confidential. Your customers continue to make payments directly to your office (not the lender) and know nothing about your arrangements with the lender. Thus the program is structured to allow you to continue your normal collection procedures.
There is no definite maturity on when the loans must be paid back. The plan is self-liquidating, and you pay the lender when your customers pay you. It is also a continuing or revolving plan. As new sales are created, the invoices generated may be assigned for additional quick cash. It's like putting your sales on a cash basis.
After you've been accepted into the program, all invoices received by the lender are handled promptly and checks are sent quickly to you.
There is never any contractual long-term obligation. You use the services only when you need them. You can discontinue your relations with the lender at any time. In addition, you don't have to finance all shipments with the lender. You can send as many or as few invoices as you like.
Because each applicant is evaluated and assigned a discount or base rate according to risk, the cost of the plan varies from client to client. Remember also that the plan is a revolving plan, and the interest rate is computed only on the outstanding balance.
Financing your working capital through the use of this plan enables you to take advantage of discounts offered you on purchases, increase your turnover, avoid "slow-pay" reputation, improve or protect your credit rating, replenish inventory to accommodate expanding sales, and enlarge facilities to handle growth in production. It also supplies commensurate borrowing power and frees management from cash flow worries.
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