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Accounts Receivable Line of Credit

One of the most interesting lines of credit available to business is called an accounts receivable line of credit.

This is an arrangement in which a business uses unpaid customer invoices or accounts receivable (AR) as collateral for a line of credit. If the business doesn’t pay off the line of credit, the lender has the right to collect the invoice payment directly from the customers.

Such an arrangement gives businesses that can’t get bank lines of credit access to lines of credit without putting inventory or equipment at risk. The business can keep operating because it doesn’t have to worry about losing inventory or equipment to a private equity lender.

Advantages to an Accounts Receivable Line of Credit

An accounts receivable line of credit is a source of financing a business can tap into quickly without having a credit report run or undergoing income verification. All a business will need to get this financing is a stack of unpaid customer invoices.

A big advantage to an AR line of credit is that all a business will have to do is fax or e-mail the unpaid invoices directly to the lender. Once the lender has verified the invoices it can make the line of credit available to the business. This process can be much faster than getting a private equity line because nobody has to wait for somebody to come out and look at the collateral.

Businesses that don’t have the cash to get hard money lines of credit or bank lines of credit could benefit from accounts receivable lines of credit. So could startup businesses, speculative businesses and businesses in industries regular lenders consider risky.

Drawbacks to an Accounts Receivable Line of Credit 

There are some serious disadvantages to an accounts receivable line of credit that businesses should be aware of. The business will not get payment on the invoices used as collateral if it doesn’t payback the line of credit. This means the business will lose all the time, money, supplies and effort used to fill those invoices.

Customers could be offended and take their businesses to competitors if they start getting collection calls from accounts receivable lenders. Many sleazy high pressure collection agencies buy invoices from AR lenders and make calls on them. A business obviously doesn’t want its customers getting calls from such collectors but it could happen.

Another disadvantage is that the business will have to pay the AR line of credit off quickly in order to keep the invoices out of collection. This could tie up funds that could be spent elsewhere or be used to pay off bills. The business might be forced to take out more lines of credit to cover expenses and drive itself deeper into debt.

When to Use Accounts Receivable Lines of Credit

An accounts receivable line of credit is a form of financing that a business should only take advantage of after exhausting other alternatives. Tying up potential income from invoices with a line of credit is something that should only be done as a last resort.

There is an interesting compromise that a business can make. It can only use invoices from customers that aren’t likely to pay or have a history of slow pay as collateral for an AR line of credit. That way it can least get some use of invoices it would normally have to write off. This would also mean that the only customers offended by high pressure collectors would be ones the business probably doesn’t want to deal with anyway.