Advance Against Collection:
A financial arrangement in which a bank or financial institution provides a loan or credit facility to a business or individual based on the value of their outstanding accounts receivable. This type of financing allows the borrower to access funds before their customers have made payment for goods or services provided. The lender typically evaluates the creditworthiness of the borrower’s customers and advances a percentage of the total outstanding receivables. The borrower is then responsible for repaying the loan or credit facility, along with any applicable interest or fees, once the customer’s payments are received. Advances against collection provide businesses with a valuable cash flow management tool, enabling them to meet immediate financial obligations or invest in growth opportunities.
Advance Against Collection refers to a financial arrangement where a lender provides funds to a borrower against the future collection of receivables. In this arrangement, the borrower pledges their accounts receivable as collateral for the loan. The lender then advances a certain percentage of the total value of the receivables to the borrower.
The purpose of an advance against collection is to provide immediate cash flow to the borrower, who may be facing a temporary shortage of funds. By pledging their receivables, the borrower can obtain a loan without having to sell their accounts receivable outright.
The terms of the arrangement typically include the percentage of the receivables that will be advanced, the interest rate charged by the lender, and any fees or charges associated with the loan. The borrower is usually required to provide regular updates on the status of their receivables and may be subject to certain restrictions on the collection and use of the funds.
In the event that the borrower fails to repay the loan, the lender has the right to collect the outstanding amount from the pledged receivables. This may involve directly collecting from the borrower’s customers or assigning the receivables to a third-party collection agency.
Advance Against Collection is a common financing option for businesses that rely heavily on accounts receivable for their cash flow. It allows them to access funds quickly and efficiently, helping to bridge any temporary gaps in their working capital.
Q: What is an advance against collection?
A: An advance against collection is a financial arrangement where a lender provides funds to a borrower based on the value of their outstanding accounts receivable. The borrower pledges their future collections as collateral for the loan.
Q: How does an advance against collection work?
A: The borrower submits their accounts receivable to the lender, who evaluates the creditworthiness of the debtors and determines the amount of funds that can be advanced. The lender then provides the borrower with a percentage of the total value of the accounts receivable as a loan. As the borrower collects payments from their customers, they repay the lender.
Q: What are the benefits of getting an advance against collection?
A: Some benefits of getting an advance against collection include immediate access to cash flow, improved working capital, flexibility in managing business expenses, and the ability to take advantage of growth opportunities.
Q: Who can qualify for an advance against collection?
A: Typically, businesses that have a consistent stream of accounts receivable and a solid credit history can qualify for an advance against collection. Lenders may also consider the creditworthiness of the debtors and the overall financial health of the business.
Q: How much can I borrow with an advance against collection?
A: The amount you can borrow with an advance against collection depends on various factors, such as the value of your accounts receivable, the creditworthiness of your debtors, and the lending policies of the specific lender. Generally, lenders may provide advances ranging from 70% to 90% of the total value of the accounts receivable.
Q: How long does it take to receive funds with an advance against collection?
A: The time it takes to receive funds with an advance against collection can vary depending on the lender and the complexity of the application process. However, once approved, funds are typically disbursed within a few business days.
Q: What happens if my debtors do not pay?
A: In the event that your debtors do not pay, you may be responsible for repaying the lender out of your own funds. However, some lenders offer non-recourse advances against collection, which means they assume the risk of non-payment and do not hold the borrower liable.
Q: Are there any fees associated with an advance against collection?
A: Yes, there are typically fees associated with an advance against collection. These fees may include an origination fee, a discount fee based on the value of the accounts rece
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This glossary post was last updated: 11th April 2024.
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