What is Accounts Receivable Financing?

Accounts receivable financing is a type of financing that a business owner can use when they are having cash flow issues. It is also often used by businesses when there is a big investment that requires more cash than is available. The business owner puts up their accounts receivable as collateral in order to secure a new loan. When the receivables are collected, the amount of the loan is then paid back to the lender.

Age of Receivables

The age of the business owner’s receivables usually dictate the amount of money they will receive from the lending institution. If the receivables are older, the amount the business owner will receive is less than they would get for newer receivables.

For example, receivables that are under 60 days old may have a loan-to-value ratio of 60 percent, while those that are over 60 days old may only have a loan-to-value ratio of 30 percent. Receivables older than 90 percent may not be able to provide the business owner with any loan proceeds at all. Should the business owner have to default on their loan payments, the lender may seize the accounts receivables that were used as collateral on the loan.