- 29 Jun
Explaining Accounts Receivable Loans
The terms "accounts receivable loans" can be used to refer to several different types of financial services for businesses. The term is not specific and can be applied to a number of products.
Taken literally, it would refer to a business loan, secured against the book debts of the borrower, which are also called "accounts receivable". "Book debts" are all the outstanding amounts that customers owe the company. These may be outstanding sales invoices that were invoiced on credit terms i.e. the customer (or debtor) has a specified period of time in which to pay the amount due. This is called open account trading, which is common practice in the UK.
The primary feature of a loan is that the principle sum borrowed, and any interest charged, is repaid over a fixed term. The term is the amount of time over which the loan is repaid e.g. 3 years. The repayment over time means that the sum outstanding gradually reduces over the term of the loan, until it is fully repaid at maturity (the end of the term).
It is not really common practice to refer to "accounts receivable loans", as they are not normally predicated upon the debtor book - rather a financial analysis of the borrowers entire financial position.
The term accounts receivable loan is more likely to mean a form of funding known as receivables finance. With this type of facility, a receivables finance company provides prepayments against the company's outstanding sales invoices. This is not strictly speaking a loan, rather a revolving facility - so using this label is again not really appropriate. However, this is the type of facility that is most likely to be referred to in this way.
Receivables finance is a revolving facility, which means that as invoices are paid by customers they pay off your prepayments. As new invoices are raised, they generate new prepayments. In this way, if the overall value of your sales ledger stays roughly static, your total available funding remains at its original level. Conversely, if your sales grow - your debtor book grows and so does the available funding. This type of funding can be really helpful to growing businesses, as it grows with them, unlike a loan.