Accounts receivable financing has been around for four thousand years for a reason:It performs.Factoring, accounts receivable financing, and asset-based financing all refer to the same thing: invoices are sold or pledged to a third party, typically a commercial finance company (but sometimes a bank), in order to speed up cash flow.
In layman’s terms, the procedure consists of these steps.A company delivers a product or service to another company and sells it.An invoice is presented to the client.A percentage of the invoice—typically between 80 and 90 percent—is transferred to the business by the financing entity when the business requests funding from the financing entity.The invoice is paid for by the customer directly to the financing company.The financing entity returns the remainder to the business after deducting the agreed-upon fees.
How is it known that the customer should pay the financing entity rather than the company from which they are receiving goods or services?”Notification” is the legal term.The financing agreement is communicated to the customer in writing by the financing entity, and the customer is required to sign off on it.The financing entity will generally decline to advance funds if the customer refuses to agree in writing to pay the lender instead of the business providing the goods or services.
Why?The creditworthiness of the customer paying the invoice is the primary security for the financing entity to be repaid.A second step known as “verification” takes place prior to the business receiving funds.The finance company checks with the customer to make sure the services or goods were delivered on time.The financing entity can reasonably assume that the invoice will be paid because there is no dispute;as a result, funds are borrowed.This is a general overview of the financing of accounts receivable procedure.
Customers are not informed of the business’s financing arrangement with the financing entity through non-notification accounts receivable financing, a type of confidential factoring.One commonplace circumstance includes a business that offers modest things to great many clients;Compared to the risk of a single customer not paying, the cost of notification and verification is excessive.Having multiple employees daily contacting hundreds of customers for one financing customer’s transactions may simply not be financially feasible.
Non-warning calculating may require extra security prerequisites like land;Personal guarantees from the business owners and superior credit of the borrowing company may also be required.Non-notification factoring is more difficult to obtain than standard accounts receivable financing with notification and verification provisions.
That’s what a few organizations stress assuming their clients discover that a business supporting substance is considering their receivables it might hurt their relationship with their client;They might lose the client’s business.What is causing this concern, why is it present, and is it justified?
According to the MSN Encarta Dictionary, the term “worry” means:
“Worry verb” (past and present participle, present participle, and third-person present singular):
1.be or make anxious is a transitive and intransitive verb:to worry about something bad that could have happened or could happen, or to make someone do this 2.irritate someone with a transitive verb:to annoy someone by complaining or demanding too much 3.try to bite an animal with a transitive verb:to attempt to injure or kill an animal by biting it, such as a dog that might be worrying sheep 4.a transitive verb equivalent to “worry” atintransitive verb continue despite difficulties:to keep going despite difficulties or obstaclesa transitive verb that repeatedly touches something:to repeatedly touch, move, or interfere with something Stop worrying that the button will fall off.
noun (plural: worrisome) Defined:
1.anxiousness:a pained disrupted feeling
2.reason for stress:something that causes concern or anxietyperiod of nervousness:a period of time spent feeling worried or anxious…”
“not to worry used to mean to tell someone that something isn’t important and shouldn’t bother them (informal).We will improve next time.
worry not; informally, the United Kingdom, Australia, and New Zealand used to say that something was no problem or not worth mentioning.
Query:Is it a sign of financial strength or weakness for a company to use accounts receivable financing to pay for its invoices?Query:Should you be concerned as a customer if you purchase goods or services from a company that is factoring their receivables?Query:Is there a single response to these questions that applies to all scenarios?
The solution is that it’s a paradox.A statement, proposition, or circumstance that appears to be absurd or contradictory but is actually true is known as a paradox.
Both a sign of strength and a sign of weakness in terms of cash flow can be found in accounts receivable financing.It is a weakness because there are no funds to provide cash flow to pay for materials, salaries, etc. prior to financing.and it is a sign of strength because, after funding, cash is available to meet a business’s growing cash needs.It’s paradoxical.It is a beneficial solution to cash flow shortages when properly structured as a growth financing tool at a reasonable cost.
You may have a valid concern if you were informed that your supplier was factoring their receivables and your entire business relied on that supplier.Your business could be severely compromised if your sole supplier went out of business.However, this holds true regardless of whether the supplier uses accounts receivable financing.It is paradoxical.This includes matters of discernment, self image and character of the characters responsible for the business and the provider.
In contracts that involve notification, verification, and the factoring of receivables, thousands of customers accept millions of dollars’ worth of goods and services every day and every month.”Notification” of accounts receivable financing is not a problem for the majority of customers:Changing the payee’s name or address on a check is all that is required.A person in the accounts payable department is responsible for making this minor clerical change.It is common practice in the business world.
For the movie “Cocktails,” Bobby McFerrin wrote and performed the song “Don’t Worry, Be Happy.”
