Accounts Receivable Financing – Don’t Worry, Be Happy

There’s a reason accounts receivable finance is a four millennium old method of financing that works: it is effective. Factoring, accounts receivable financing and asset-based financing all refer to the same concept in relation to loan based on asset invoices are pledged or sold to a third-party typically a commercial finance firm (sometimes an institution) to speed up cash flow.

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Simply put, this procedure is as follows. A company sells and provides an item or service to a different business. The client is invoiced. The company requests funds from the financing company and an amount from the amount (usually between 80% and 90%) is paid to the company by the financing company. The client pays an invoice to the funding company. The agreed on charges are taken out and the rest is refunded to the company by the financing institution.

What does the customer need to know that they have to pay the finance entity instead of the company that they receive products and services? The legal term used is “notification”. The finance company notifies the customer in writing of the terms of the financing contract and the customer is required to consent in writing to the arrangement. If, in general the client does not agree in writing for the loan to be paid by the bank in lieu of the company that provides the products or services the entity financing it will refuse to advance funds.

Why? The most important security for the financial institution to repay will be the credibility of the client making the payment. Before the funds are advanced to the business , there is another step known as “verification”. The finance institution confirms with the client that the items have been received or services completed in a satisfactory manner. If there is no disagreement, it is reasonable for the financial institution to conclude that an invoice is paid and consequently, funds are advanced. This is a broad overview of the way in which the financing of accounts receivable process operates.

Non-notification of accounts receivables financing is a form of private factoring where customers are not informed about the financing arrangement of the company with the financing company. An example of this is the sale of low-cost products to thousands of clients The cost of notification and verification is high in comparison to the potential risk of a non-payment by a single customer. It is not financial sense for the financial institution to have multiple employees who contact hundreds of customers regarding one transaction with a financing customer every day.

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Non-notification factoring might need additional security requirements, such as real estate, and the higher credit ratings of the company that is borrowing may be secured with personal guarantees from the business’s owners. It is harder to get non-notification factoring as opposed to the usual account receivable finance with the notification and verification clauses.

Certain businesses are concerned that if their clients learn that a commercial financial institution is factoring their receivables into their accounts, it might affect the relationship they have with their customers and they could lose the business of their customer. What’s the problem what is the reason for it, and is it justifiable?

The MSN Encarta Dictionary defines the word worry as:

“Worry

Verb (past and past participle wororied, current participle wororyoing, third person who is present in singular worories)Definition:
1. Verb that is transitive and intransitive be anxious or be anxious to be worried about something that is unpleasant, which may have occurred or could occur, or to make someone do this

2. Transitive verb to annoy someone to make someone angry by insisting on demands or complaints

3. Verb transitive try to bite an animal: attempt to injure or kill the animal through biting

A dog that is believed to be being concerned about sheep

4. transitive verb

Similar to the worry over

5. Intransitive verb to continue regardless of difficulties: to continue in a steady manner despite obstacles or difficulties

6. Verb transitive that means to touch or move repeatedly by touching, moving or alter the same thing repeatedly

Do not be concerned about the button because it will come off.

noun (plural worories)Definition:
1. anxiety: an unsettling feeling

2. The root of anxiety: anything that triggers anxiety or worry.

3. Anxiety A time when you feel worried or anxious …”

The reverse is:

“not to be concerned” is used to convey to someone that something isn’t crucial and does not need to be of worry (informal)

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Do not be concerned. We’ll do better next time.

There’s nothing to worry about U.K. Australia New Zealand used to say”something does not cause any trouble or is not worthy of mention (informal)”.

A question: If a business has a way of financing their invoices through the financing of accounts receivable is this an indication of their financial strength or weakness? From the viewpoint of the consumer when you purchase items or services through a company which is factoring in their receivables should you be worried? Question: Is there an answer that is applicable to all scenarios?

It’s an unanswerable paradox. A paradox is a claim or proposition that appears to be paradoxical or contradictory, yet it could be the case.

Finance for accounts receivables is an indication of weakness with regards to cash flow, and an indication of strength with regard the flow of cash. It’s a weak point since, prior to funding the funds aren’t readily available to pay for material or salaries. This is an indicator of strength since, after to financing, cash is readily in the bank to help a company’s need to expand its cash flow. This is paradoxical. If properly designed as a tool to finance expansion at a cost that is reasonable it can be an effective option to address cash flow issues.
If your entire business relied on a single supplier and you learned that the supplier was factoring in their receivables, there could be an issue to be concerned about. If your sole supplier was to go out of business and your business was affected, it could be severely damaged. However, this could also be the case regardless of whether the supplier utilizes accounts receivable financing. This is a paradox. It’s a matter of perception, ego and the character of the individuals who are in charge of the company as well as the supplier.

Every day, throughout the month thousands of customers purchase millions of dollars worth of items and services under contracts that require notifications, verification, and the financing of receivables. For the majority of customers “notification” of accounts receivable financing is not a problem as it’s merely changing the address or name of the payer on a cheque. It’s the job of an employee of the department of accounts payable to perform a minor clerical update. This is a standard procedure in business.

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