Accounts receivable are one of the most liquid assets any firm holds. As such, they make excellent security for short-term loans needed to cover payroll, materials, costs tied to production, and even expansion.
Accounts Receivables based financing involves the use of the borrower’s accounts receivable (credit) sales to secure short-term loans. It’s a form of asset based lending, but instead of using a combination of inventory, equipment, receivables and other assets to secure the loan, only the organization’s accounts receivable are pledged.
Receivables based financing is available through banks and NBFCs specializing in this type of lending.
Usage of Loan against Account/Invoice Receivable
Any manufacturing, distribution or service company requiring short-term financing to manage its business may find A/R based financing of value.
This type of loan is particularly useful when:
- The organization urgently requires cash to stay in business.
- The bank refuses to grant unsecured credit.
- A higher line of credit is required than the bank will provide.
- A short-term increase in cash is required to fund an expansion opportunity.
- A major customer slows down its payments causing the creditor to face a serious cash flow issue.
New organizations that have not yet developed a credit track record of their own, however, will generally be unable to obtain Account Receivable based financing.