Mitigating Techniques for Commercial Risk/Accounts Receivable Financing-Transference or Mitigation
|Unit 3.5- Mitigating Techniques for Commercial Risk||
Introduction | Commercial Banks | Loans | Letter of Credit | Draft Collection | Accounts Receivable | Governments | Factoring | Forfaiting | Banker's Acceptances | Credit Insurance | Summary | Resources | Activities | Assessment
Accounts Receivable Financing –Transference or Mitigation
Accounts receivable financing is a particular form of collateralized lending. In addition to banks, finance companies offer accounts receivable financing to both sellers and buyers. The collateral taken is receivables; and financing is with recourse to the seller or buyer, depending on the agreement. For example, a transaction could look like this: the product that the buyer is acquiring is used as collateral. If the buyer defaults, the seller gets his money, but the lender has the right to attach or “go after” the buyer and try to recoup the loss.
Normally a finance company will offer this type of financing for up to 70 percent of the eligible accounts receivable. Each buyer and location must be acceptable credit risks. With this method, a buyer is able to borrow money against its short-term open account receivables. Generally, this is a very expensive financing option. If a bank loans without recourse, then it is left holding the debt and cannot go after the originator of the loan or contract.