What are an accounts receivable line of credit?
An accounts receivable line of credit is a form of financing in which a lender gives you access to a pool of money from which you can withdraw at any time. Access to this funding is given in exchange for collateralizing your accounts receivables.
When you are approved for an accounts receivable line of credit, the lender either buys your accounts receivables or uses them as collateral and then they give you a predetermined amount of money that you can use whenever you need immediate cash.
How does an accounts receivable line of credit work?
An accounts receivable line of credit works like a typical bank line of credit, only your accounts receivables are on the line. When you have an AR line of credit, the lender gives you a limited pool of money that you can use whenever you need it. You may withdraw from this pool of money at any time, but it also follows that the more money you take, the smaller your pool of money becomes.
How you repay the money that you withdraw depends on your agreement with the lender. Some lenders implement an accounts receivable line of credit by buying your invoices in bulk. You essentially sell them your invoices, they give you access to a predetermined amount of cash, and they take care of collecting the payment of your invoices.
Here at MMP Capital we implement the AR line of credit by giving you the same access to a pool of funding and using your accounts receivables as collateral. This means that you are expected to pay back the amount of money that you borrow at regular intervals, just like a traditional line of credit from a bank. If you fail to pay the loan back, the lender has the right to recover their money from your accounts receivables.
How is an accounts receivable line of credit different from other financing options?
Accounts receivable line of credit vs. traditional bank line of credit
An AR line of credit works the same way as a traditional line of credit from a banking institution. In AR line of credit, however, your accounts receivables act as security for the lender resulting in more favorable terms.
Most banking institutions offer a business line of credit to companies that have good credit ratings, and they require no collateral. With an AR line of credit, you use your accounts receivables in exchange for getting access to a pool of money that lenders will loan you. You either sell the lender all your invoices and they give you the pool of funding as advanced payment, or you use your invoices as collateral if you fail to pay the lender back.
Because a business line of credit from a traditional banking institution is a form of an “unsecured” loan, it requires a more stringent approval process. An AR line of credit from a lending institution is relatively easier to get, although your invoices and financial status still must be of good quality.