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Account receivable financing

Financing Receivables

Receivables represent amounts due and receivable against sale/lease of goods/ services/facilities, rent, salary, royalty etc. Usually, a business unit may have such receivables though in certain cases a non-business individual or organization also may have receivables due. Some examples of account receivable financing against which finance gets extended are given below:

(a) Against supply materials by traders or manufacturers;

(b) Against supply of transport vehicles (e.g. bus/truck/car/aeroplane/ship) sold on hire purchase basis;

Against export of goods on credit basis;

(c) Against supply of software, architectural designs, brokerage for arranging supplu of goods;

(d) Against lease of machines/vehicles;

(e) Against lease of a building or land or space for residence, office or a factory;

(f) Against grant of rights to publish a book, or manufacture and sell a drug;

(g) Personal loans repayable out of future salary;

Account receivable financing can be allowed preferably against charge or hypothecation of receivables whereby the lenders is vested with the right to collect or recover the Receivables either in the normal course of business or in the event of default by the borrower. The charge can be effective and exercisable only if the debtor is notified of the charge and agrees to honour the same to make payment to the chargee/hypothecate. Te charger/hypothecator while creating charge/hypothecation of receivables confers upon the chargee/hypothecatee (the lender) the right and power to collect/recover the receivables either in the normal course of business or in the event of default committed by the borrower. In certain cases where the debtor is only one or the debtors are few, it might be feasible and worthwhile to arrange for the debtors to issue their cheques (in discharge of their debts) in favour of the lending institution a/c the borrower such that in the normal course of business itself the borrower's outstanding dues get realized. Where the number of debtors is large and the borrowers credit standing is excellent it may be sufficient if the debts are allowed to be collected by the borrower and the borrowers makes payment to the lender from out of the borrowers realizations.

The borrower is required to submit to the lender a weekly or fortnightly or monthly statement of receivables charged to the lender. It should be open to the lender to make a visit to the borrowers place of business and verify the genuineness and correctness of the statements of account receivable financing furnished by the borrower with reference to the invoices raised and acknowledgements of indebtedness from the debtors.It is also advisable for the lender to obtain directly from the debtors (at least the major debtors) their confirmations of outstanding balances due to the borrower.

It is incumbent on a debtor who has been duly notified of the lenders interest in dues outstanding

from the debtor to pay the debts due from him to the lender alone if and when called upon to do so by the lender. The debtor becomes liable to the lender if he fails or neglects to do so. Various courts have held that charge over receivable coupled with a Power of Attorney issued by the company to which the debts are due constitutes an 'equitable charge' which is legally enforceable.

It is the practice of lenders to extend finance

upto the drawing power determined as a certain percentage (say, 50% or 60%) of the value of receivables as reported in the periodical statgement submitted by the borrower as per the stipulation of the lender.

Finance against receivables is extended in many cases in combination with finance against the stock required at the peak level or in the normal course of business. This is referred to as finance against working capital required which covers both stock and receivables.

Some lenders allow finance against invoices raised against supplies made including those on credit. This sort of finance is referred to as 'Factoring'.

Such facility can be with reourse or without recourse to the supplier-borrower. 'Forfaiting' is finance extended on long-term basis, particularly where the buyer-debtor is abroad.

Finance against vehicles like aeroplanes, ships etc. is allowed as medium-term credit repayable within three years or long-term credit repayable in five to seven ot even ten years.

One of the most most important pre-conditions to be fulfilled for a borrower to be eligible for finance against his receivables is that the borrowr should have very high credit rating.

A lender against charge on account receivable financing gets preference and priority as a secured creditor vis a vis the liquiditor and unsecured creditors of the same borrower.

The chargee/hypothecatee of Receivables steps into the shoes of the borrower and has the power to take

direct legal action against defaulting debtors of the borrower in the event of the borrower's default in repayment to the lender.

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