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[A179]Accounts Receivable Write Off

by Cassandra Ingraham, Cas

Banks won't lend money to a business seeking to acquire larger contracts because its not viewed as an asset. So if you are a small start up company, funding for expansion may be hard to obtain. Accounts Receivable Financing could be the key to funding for a start up with desires to bid on large Government (or Corporate) contracts.

So what is Accounts Receivable Financing? It is the selling of your accounts receivable invoices for cash versus waiting 30-60 or 90 days to be paid by your customer. Accounts Receivable Financing is also know as Factoring.

Securing the services of an Accounts Receivable Financing Company will allow a small company to bid on almost any contract within reason. A small company would know in advance that the funds needed to produce goods or provide services are available once they win the contract. In fact, some A/R Companies will advise you on which companies they will Factor Invoices from and which to avoid! (Federal Government contracts are considered "gold" however not all Factoring companies can handle Government Receivables)

One of the major concerns for most small business owners is how much does Accounts Receivable Financing cost? Between 1 to 5% generally speaking. Since Accounts Receivable Financing rates depend on the credit-worthiness of your customers, your average invoice, average payment cycle, and factoring volume, its hard to predetermine the exact cost of the money. However, you should remember, whatever the cost is: Its TAX DEDUCTIBLE and this is important. This means that the cost to factor is offset by IRS.

Not all Factoring companies are created equally (you can't tell that by looking at their web pages). A Cash Flow Consultant or an Accounts Receivable Broker can stir you in the right direction. There are issues such as: process to acquire funding, will the Accounts Receivable Financial company (factoring) company handle your collections, will they provide the funds through a credit card or will they wire the monies into your business checking account, will the Accounts Receivable Financial company factor with recourse or without recourse? (Meaning will they take responsibility for the debt or will you the client take ultimate responsibility? The rates are different)

Sometimes an A/R Broker has a choice, but not all the time. For instances, there are not that many companies that provide Accounts Receivable Financing for health care or construction. It all depends on what type of business you have and what your needs are.

Accounts receivable financing is nothing but selling your outstanding invoices or receivables at a discount either to a factoring or finance company, which assumes risk on the receivables and gives you instant cash for your business. Depending on the age of a receivable, the amount of value is assigned to the account. Business houses use these loans in order to avoid the bad cash flow in the company. Sources for accounts receivable financing could be commercial financial institutions and banks. Accounts receivable is also known as accounts receivable funding or accounts receivable factoring.

This form of financing comes in the category of secured loan, where accounts receivable acts as covenant against cash. As the receivables are collected, the loan is repaid. Accounts receivables have a particular time or an age. A current invoice will pay you more. Any accounts receivable over 90 days are not financed. Thus, the older the invoice the less value it has. Sometimes the lenders don't pay attention to the age of the accounts, but when they find the accounts is over 90 days, they may refuse to finance. Few lenders may apply a scale to value the accounts, such as accounts which are 31 to 60 days old have loan to value ratio of 60 % and accounts from 61 to 90 days have 30%. Sometimes the overall creditworthiness of the account of debtors may affect the loan to value ratio.

Some of the benefits of accounts receivable financing are:

Free working capital: Most of the companies have the majority of capital tied up inventory. But, accounts receivable financing allows you a free capital tied in inventory.

Instant cash: Accounts receivable funding doesn't require any kind of business plan or tax statements. Instant cash is provided, which are being used by business houses during a bad cash flow in their organization.

Pass off Collections: Passing off your accounts receivable management to the factoring company will help you to focus on other perspectives of your organization, which can take you to road of success.

Make advantageous purchases: Availability of funds enables you to buy advantageously from suppliers and can take advantage of special offers or discounts.

Before plunging your feet into accounts receivable financing, you should do a thorough research about certain factors. A monthly interest rate is calculated to the daily percentage to the outstanding receivables each day. The lesser the outstanding bills the lower the interest. But a default on payment can let the financier seizing the pledged accounts receivable. In some states a notice is required to be sent to the business' debtors that their debt has been pledged as loan security. But in some other state, the businesses do not notify the customers because they fear that customers might feel that this method of financing is a sign of instability.

So, before using accounts receivable you should see, that the financial strategy matches with your business plan, and that your business should be ready for more money and expansion and try to explore all kind of sources for small businesses financing. You should spend some quality time to investigate the companies you are working with and analyze contracts to negotiate discounts.

Article Source : Best Way To Save Tax

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Both Cassandra Ingraham & Kris Koonar are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.

Cassandra Ingraham has sinced written about articles on various topics from tax, Tax and Finances. . Cassandra Ingraham's top article generates over 880 views. to your Favourites.

Kris Koonar has sinced written about articles on various topics from Site Promotion, Certified Public Accountants and Culture and Society. can help your trucking company grow. Get cash instantly without taking out a loan. To learn more ab. Kris Koonar's top article generates over 550000 views. to your Favourites.