Purchasing Accounts Receivable

Written by Patricia Tunstall
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When deciding whether or not to purchase accounts receivable, factoring companies look at your customers, whereas banks, with their more conservative background, look at you and your customers. Banks are interested in financing growing businesses that have potential for consistent profitability, despite a temporary lack of cash flow. When they find them, they often establish lines of credit, which are close to the conventional approach they are familiar with.

Credit Lines Are Varied

Credit lines are handled differently by various factoring companies. Banks treat them as if they were part of conventional loans, and some factors set them up as a mere passing maximum on your credit line. In this scenario, your ability to grow your business and produce receivables determines your credit line. If your business grows rapidly, your credit line will keep pace.

When factors use credit lines, this flexibility and expansion are critical to a prospering business. Healthy businesses that grow 10-fold in two years often turn to factoring to enable them to sustain that kind of growth. Few startup businesses have the cash flow available to underwrite such an increase in business because their cash is tied up in accounts receivable.

The traditional letters of credit (LOC) are still used, but are being phased out because of the popularity of factoring. They are still prominent in import/export transactions, as are factoring arrangements. The letters of credit authorize the seller to draw drafts up to a certain amount under certain conditions and terms. LOC can be used in the financing of residential housing, in community lending situations, and for asset/liability management.


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