An Accounts Receivable Line of Credit (AR LOC) stands out as a flexible and valuable tool for managing cash flow. Essentially, an AR LOC allows businesses to borrow against the value of their outstanding invoices. Unlike traditional loans or lines of credit that may require collateral like real estate or inventory, an AR LOC is secured by the accounts receivable, making it an accessible financing option for many businesses.
Here’s a breakdown of how an AR LOC works and its key components:
Securing the Line of Credit
Businesses can apply for an AR line of credit with a funder. The funder evaluates the creditworthiness of the business and its customers, focusing on the quality of the outstanding invoices. If approved, the funder extends a line of credit. This can range from 70% to 90% of the total value of the eligible accounts receivable.
Accessing Funds
Once the AR LOC is in place, businesses can draw funds from the line of credit as needed. They simply submit eligible invoices to the funder, who then advances a portion of the invoice value. This immediate infusion of cash provides businesses with the liquidity they need to cover operating expenses, invest in growth initiatives, or seize new opportunities.
Repayment Structure
Repayment of an AR LOC is tied to the collection of receivables. As customers remit payments for the outstanding invoices, the funds are used to repay the outstanding balance on the line of credit. This creates a revolving cycle where businesses can continually borrow against new invoices as old ones are paid off, providing a steady source of working capital.
Benefits of an AR LOC
AR LOC offers several benefits for businesses:
Improved Cash Flow
By converting outstanding invoices into immediate cash, AR LOC helps businesses maintain a steady cash flow to meet operational needs.
Flexibility
AR LOC provides flexibility in borrowing, allowing businesses to access funds as needed without the constraints of fixed repayment schedules.
Risk Mitigation
Funders assume some of the credit risk associated with the receivables, reducing the risk of late payments or non-payment by customers.
Collateral Utilization
Utilizing accounts receivable as collateral enables businesses to unlock the value of their assets without the need for additional collateral or personal guarantees.
Cost Considerations
While AR LOC offers flexibility and convenience, businesses should consider the cost implications. Funders typically charge interest on the outstanding balance of the line of credit, along with any additional fees or charges. Businesses need to review the terms and compare multiple offers to secure the most favorable financing arrangement.
Applicability Across Industries
An accounts receivable line of credit is a versatile financing option that can benefit businesses across various industries, including manufacturing, distribution, wholesale, and services. As long as a business generates invoices with creditworthy customers, it may be eligible for an AR LOC.
In summary, this product is a powerful tool that enables businesses to leverage their outstanding invoices to access working capital. By understanding its mechanics and benefits, businesses can make informed decisions to optimize their cash flow and support their growth objectives.
