The announcement of a corporate bankruptcy generally injects a note of alarm in the business environment, especially if the filing firm is a major industry player. The company's ability to repay lenders then becomes fraught with uncertainty, and stockholders bid corporate shares down. To prevent financial turbulence, department heads monitor accounts receivable and--if necessary--sign receivable-financing agreements with business partners.
Receivable financing often takes various forms, the most common of which are factoring and customer financing. A factor is an individual or company that accepts a company's accounts receivable for a short-term loan. The factor generally charges a fee, usually a percentage of the principal amount, before advancing funds to the business. Corporate leadership's underlying motive in accepting customer financing is often to do more business with a trustworthy partner. In fact, this source of funding is advantageous to a company because it already knows the customer and receives funds upfront. In a typical customer-financing scheme, the client pays for goods in advance.
Receivable financing enables a company to operate without the headache often associated with liquidity shortfall. In essence, the practice helps the firm buy time and access funds before customers pay. Clients often do not pay for goods on receipt, thus creating a problem if a supplier needs cash right away. Receivable financing may be a thorn in a company's relationship with its lenders because factoring adds more indebtedness to the firm's balance sheet.