Accounts Receivable Has Many Uses

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by: schnibitzjetsubmit
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Date: Mon, 10 Aug 2009 Time: 8:42 AM
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Using accounts receivable or invoices as collateral to gain working capital from a financial institution is called accounts receivable financing. When conventional loans can't be obtained, a business experiencing temporary cash flow problems can get accounts receivable financing based on their incoming invoices. Lending institutions will also use the term factoring when referring to accounts receivable financing options. 

A common lending alternative for businesses in need of working capital, but currently operating with limited funds, is small business factoring which provides loans to purchase materials and pay pending bills. A factoring company accepts the unpaid invoices of the business getting the small business factoring loan. The advance is repaid by the invoice payments going directly to the factoring institution.

Small businesses needing advance funding to grow or maintain operations may choose to turn over all or a part of their invoices to a factoring company to receive accounts receivable financing. Small businesses have used factoring as a financial solution, in a tightening credit environment, as a source of working capital while waiting for invoices to be paid.  Receivable balances, by customer and date due, are periodically summarized in the Accounts Receivable Aging Report.

When structuring the company's operating budget, the receivables monitoring information in the Accounts Receivable Aging Report can be a valuable aid. A record of when payments are received by customers and how much is needed to operate the business provided by Accounts Receivable Aging Reports; allowing a company to better plan its cash flow needs.  Many financial institutions will offer their debt portfolios for sale to investors or alternative financing institutions.

It's not uncommon for debt portfolios to be bought and sold among lending institutions. Sales of existing loans by on lending company to another company frees up capital for new loans. Purchasers of debt from another lender are then become the recipient of the remainder of the principal and interest from the borrower.

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