If you`re a business owner, you may often find yourself in need of cash to cover expenses or invest in growth opportunities. One way to secure funding is by assigning your accounts receivable to a lender through an assignment of account receivable agreement.
An assignment of account receivable agreement is a legal document that allows a business to sell or assign its outstanding invoices or accounts receivable to a lender in exchange for immediate cash. This type of financing is called accounts receivable financing or factoring.
When a business sells its accounts receivable, it is giving up its right to collect on those invoices in the future. The lender, in turn, pays the business a percentage of the total value of the invoices upfront, typically between 70% to 90%. The lender then collects the full amount owed by the customers, keeping a fee for the financing and any additional charges for late payments.
There are several benefits to using an assignment of account receivable agreement. First and foremost, it allows businesses to receive immediate cash instead of waiting for customers to pay their invoices, which can take up to 90 days or longer. This can help businesses to fund ongoing operations, hire new staff, or invest in new projects.
Another significant advantage of accounts receivable financing is that it doesn`t require collateral such as property or other assets. Instead, the lender looks at the creditworthiness of the business`s customers to determine the risk of non-payment. This makes it an excellent option for businesses that may not have sufficient collateral to qualify for traditional bank loans.
Accounts receivable financing can also be an attractive option for businesses with poor credit or a limited credit history. Since the lender is primarily concerned with the creditworthiness of the business`s customers, the business`s credit score is less important.
However, there are also some drawbacks to using an assignment of account receivable agreement. The lender`s fees can be relatively high, typically ranging from 1% to 5% of the total amount of the invoice. This can be more expensive than traditional bank loans or other forms of financing.
Additionally, accounts receivable financing can affect relationships between the business and its customers. When customers are notified that their invoices have been assigned to a lender, they may become wary of the business`s financial stability or question its ability to fulfill their orders. This can create tension and potentially damage the business`s reputation.
In conclusion, an assignment of account receivable agreement can be a valuable financing option for businesses looking to access immediate cash. However, it`s essential to weigh the benefits and drawbacks carefully and evaluate the lender`s fees and reputation before entering into such an agreement. If done correctly, accounts receivable financing can provide the bridge to business success.