Accounts Receivable Financing

Written by Robert Mac
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Accounts receivable financing, or factoring, turns debts into cash for a business. By selling a company's accounts receivables to another company called a factor, they gain capital which they can use for any number of investments. However, one of the downsides of accounts receivable financing is that the debts are sold for less than face value.

Since accounts receivables are monies owed to a company--and therefore, an asset--some would argue that it's not wise to sell them for less than they are worth. However, since they are owed to a company, and not owned by them, they aren't worth anything ... until they are collected. Collecting debts can become very expensive, and for some companies, it's not worth the price.

The Risk of Accounts Receivable Financing

In accounts receivable financing, there is a slight risk involved for both the company selling their debts and the factor that buys them. For the company selling, there is always the nagging suspicion that they are selling low and that the factor is going to collect the whole jackpot with ease. For the factor, the risks are greater: there is a chance the debtors will never pay, and they'd be stuck with an IOU forever.

In the world of finance, though, there are always risks--from the smallest bank loan on up. Even after studying all the scenarios and credit reports, after reading all the fine print and watching all the market reports, there is always a degree of risk. Being as informed as possible won't change that, but it will put the odds in your favor.

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