Disadvantages Of Account Receivables

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Account receivables are used as a type of asset – financing to determine the outstanding invoices or the money owed by the customers. The account receivables can help finance companies by boosting its cash flows. It focuses on trying to collect bills from customers. The unpaid invoices are also considered in the account receivables and referred as bad debts. Bad debts are debts that customers are not able to pay either because they are bankrupt. In account receivables financing also known as factoring, gives the company an amount equal to a reduced value of the unpaid invoices. This type of financing helps the company to free up the capital that is stuck in unpaid debts. The account receivables financing companies advances 70 to 90 % of the value of the outstanding invoices, then the factoring company collect the debts and pays the original company the remainder of the amount collected minus a fee for the services. This…show more content…
Asset based lending is an on-balance sheet technique and typically comes with significant fees. Companies commit the majority of their receivables to the program and have limited flexibility about which receivables are committed. Interest rates on these loans, as you can imagine, are less than interest rates on an unsecured loan or line of credit because if the borrower defaults the lender has the ability to seize assets and attempt to recoup their lending costs. If companies goes bankrupt, companies that cannot meet their financial obligations can either dissolve or reorganize and start anew. Federal laws provide bankruptcy protection, govern the right to file and have jurisdiction over all bankruptcy cases. State laws determine what company assets are protected in bankruptcy. A bankruptcy filing immediately halts a company’s creditors from debt collection efforts. Collection efforts resume when the bankruptcy court allows
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