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Accounts receivable financing is when a business have difficulty or don't have adequate resources to track and chase the accounts receivable amounts from debtors and they have some cash flow problems or working capital problems. In this situation the Small business or a business facing cash flow problems may use factoring as a source of financing or may take a sort term loan at a competitive interest rate to meet its cash commitments of the business to meet expences or pay accounts payable.

In any business accounts receivable is inevitable and if they default the credit terms and if the business enterprise have difficulty collecting their dues they may face cash flow problems and may become insolvent. Therefore accounts receivable financing is viatal in circumstances where they face cash flow problems and evaluate the least cost method of financing the accounts receivable problem. Mostly factoring is the most popular method of financing accounts receivable. However, this method of financing is very costly depending on the nature of the accounts receivable balances of the business enterprise concerned. Factoring means an enterprise sells its accounts receivable and gets the accounts balances from the factoring company for a particular fee. The other method is to have a short-term borrowing from a financial institution to meet its cash commitments and repay the loan on a continuous monthly or fornigtly basis. This may be a cheaper method of financing compared to the factoring method for some business enterprises depending on the interest rate they charge for the short-term loan.

As discussed above accounts receivable financing means is to resolve cash flow problems arising from the difficulty in collecting dues from the dtrade debtors within the credit period and it a source of an enterprise cash flow problems and insolvency. As well it is essential to have an adequate working capital so that the company can work without any significant liquidity problems. The enterprise has to evalaute different options comparing the least cost method of financing the accounts receivable to effectively fiance the accounts receivable and not solely focus on factoring which is very costly for some enterprises particularly for small business enterprises. For any business in some economic and in some circumstances accounts receivable financing is inevitable to overcome cash flow problems.

Learn more about this author, Sithambaranathan Prithiviraj.
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