Types of Accounts Receivable Financing
There are three primary forms of accounts receivable financing. Here is a detailed look at each of them:
Factoring is deemed the most generic variant of account receivable financing that serves small businesses. In this type of accounts receivable financing, the borrower’s receivables are purchased by a factoring company.
The borrower sells their receivables at a lesser price or a discount. The discount amount depends on the receivables’ quality.
2. Asset-Backed Securities:
Asset-backed securities or ABS refers to a form of financing that caters to bigger businesses. It is deemed a fixed income instrument where investors receive coupon payments by deriving cash flows from the company’s multiple underlying assets.
One of the most common examples of ASB is mortgage-backed securities, where mortgages are pledged as underlying assets.
3. Accounts Receivable Loans:
Accounts receivable loans are a variant of short-term funding wherein borrowers can utilize their accounts receivables by pledging them as collateral to acquire funds from banks.
In the case of accounts receivable loans, the bank generally offers up to 80% of the receivables’ face value. The amount of the fraction depends on the quality of receivables, i.e., the better the quality of the receivables, the higher the funds provided by the bank.
Eligibility Criteria for Accounts Receivable Financing
To acquire accounts receivable financing, every individual should fulfil specific requirements to become eligible. The eligibility criteria differ among different lenders. However, here is a list of conditions that are considered to be common amongst all lenders:
Age of the Applicant:
The individual applying for accounts receivable financing should be at least 25 years old. Moreover, their age should not exceed 55 years.
Any individual who wishes to acquire accounts receivable financing should at least have 3 years of business-running experience.
The applicant must present to the financial institution from which they wish to acquire accounts receivable financing updated IT returns of the last three years.
Features and Benefits of Accounts Receivable Financing
Here are some of the most prominent features and benefits of accounts receivable financing:
Accounts receivable financing can be easily availed online through numerous outlets. Many lenders have a reputed online presence. Moreover, they offer lucrative lending services on their official websites.
- Depending on the accounts receivable, financial institutions can lend borrowers funds up to 45 lakhs.
- In accounts receivable financing, only accounts receivable are taken into consideration. Hence, the customer is not required to pledge an asset as collateral to acquire the loan.
- To ensure the protection of credit, individuals can sell their accounts receivable to the lending company and collect their receivables by eliminating defaults.
- Numerous lenders allow customers to withdraw the required amount of funds. Moreover, they also offer multiple types of repayment facilities besides providing flexibility.
- Some specific lenders offer customers the option to lower their EMIs to around 45%.
- Individuals can also avail of pre-approved financing offers without facing the hassle of standing in long queues, filling out tons of paperwork and indulging in other formalities.
How to Apply Online
Any individual looking for funds can conveniently apply for accounts receivable financing via different outlets such as an online website or SMS facilities. Here is a detailed look at both methods:
Through Online Portals:
To start applying for accounts receivable financing, an individual needs to navigate to the lender’s official website, click the “Apply” button, fill all the mandatory sections asking for different details and submit it. If their documents and information match the eligibility criteria, the applicant will receive a call back from the lending company‘s customer service executive to proceed further.
Through SMS Facility:
Besides the online method, interested individuals can also apply for accounts receivable financing via SMS. All the individual needs to do is send a message to the number listed on the lender’s official website. After a while, a customer service representative will revert to them, and they can proceed further with the application.
Essential Documents Required for Accounts Receivable Financing
Like all official procedures, applying for accounts receivable financing involves presenting numerous documents to the lending company. Here is a list of documents applicants need to provide while applying for accounts receivable financing:
- A photocopy of the official invoice or accounts receivable
- Proof of order delivered
- Proof of business ownership
- Proof of identity
- Proof of address
- Proof of age
- Financial certificates
- Proof of residential status
- Collateral ownership papers (in case of loans)
What is the difference between a Commercial Loan and Accounts Receivable Financing?
As opposed to commercial loans, accounts receivables financing involve lesser limitations. Here are some of them:
- Commercial loans feature an upper limit when it comes to the financing amount. On the other hand, accounts receivable financing involves no such limit.
- Commercial loans’ balance sheets reflect debt. However, balance sheets do not reflect any debt if an individual opts to acquire funds through accounts receivable financing.
- Commercial loans require customers to sell their business equities. When it comes to accounts receivable financing, customers are not expected to sell off their company’s equities with the advantage of factoring.
Interested individuals can apply for accounts receivables financing online in two ways – by sending an SMS to the lending company’s official number or by calling on their registered helpline number. Besides this, they can also choose to fill up an online application form.
Yes. Irrespective of what field an individual belongs to, they are eligible to apply for accounts receivable financing if they have good credit ratings and are working or have worked with a renowned company or owner.
Even though it is essential to have a steady credit rating, you can be considered for accounts receivable financing even if you have a strong customer list.
Individuals can apply for accounts receivable financing through various financing companies and online outlets.
Account Receivable financing is prevalent and favoured in industries like transportation, distribution, trucking, manufacturing, wholesale sectors, etc.
Invoice factoring is referred to as a business and funding solution. It facilitates entities to acquire funds quickly and efficiently.
The list of valid identification documents includes Aadhar card, PAN card, driver’s license, and passport.
Yes. The financing rate varies between 75% and 95%, depending on the industry and its volume.
On a company’s balance sheet, Account Receivable financing refers to the funds owed by a company to its clients who have utilised its services based on a credit model.