The Pros and Cons of Accounts Receivable Financing by Marco Carbajo

TL;DR - Explanation of full recourse, reserve accounts, and reserve amounts in accounts receivable (AR) financing and pros and cons of AR financing

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Tags - accounts receivable (AR) financing, pros and cons of AR financing, AR financing structures, AR asset sales, AR loans

Questions answered:

  • What do full recourse, reserve accounts, and reserve amounts mean in accounts receivable (AR) financing?
  • What are the pros and cons of AR financing?

Summary:

  • Full resource, reserve accounts, and reserve amounts
    • Some AR financiers may include a full recourse clause which allows them to force the business to pay any invoices that are uncollectible after a specified period.
    • Some agreements allow AR financiers to take a percentage of the paid invoices and place those into a reserved account, which will help to cover any uncollectible invoices.
    • Some AR financiers may include a reserve amount condition which allows them to withhold some of the finance funds until invoices are paid.
  • Pros of AR financing:
    • No need for collateral: AR financing is usually an unsecured business financing option that does not require any collateral in the form of assets and guarantors.
      • When AR financing is structured as a loan, the AR book is seen as collateral to the loan and the company retains the ownership of the AR book and the duty to collect those debts.
    • Retaining ownership of business: business owners are not required to give up any control of their businesses.
  • Cons of AR financing:
    • Higher costs: although it is a quick way of obtaining cash for a business, its costs may be higher than the rates charged on other types of business loans. Failure to pay back the amount within the predetermined period will only increase the total amount to be paid.
    • Lengthy contracts: some agreements can be long and winding; it is crucial to negotiate the length of the contract that is suitable for businesses.

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