What Is the Difference Between an Accounts Receivable Loan & a Working Capital Loan?
Two parts make up a company's capital structure: debt and equity. However, there are other ways to obtain capital. One of those ways is selling non-critical asset, such as an accounts receivable loan. A form of debt capital is a working capital loan.
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Accounts Receivable Loan
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An accounts receivable is created when a company sells a service or good on account, and no payment is received. The seller agrees that the buyer will provide payment within a certain time frame. An accounts receivable loan is selling the processing of the accounts receivable and receiving upfront cash for it, which provides capital for a company if it is need of it. The only downside is that there are fees associated with selling accounts receivables, and those could cut into the profitability of a company.
Working Capital Loan
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The working capital of a company is the capital used for the day-to-day operations of a company. It is calculated by taking the current assets and subtracting current liabilities. All else being equal, a company prefers a low working capital amount as that means that it will have less money invested and less need for capital. A working capital loan is a loan provided by the bank for a short-term period for the day-to-day operations of a business. It could be that a company is running low on cash because its customers are taking awhile to pay it. Whatever the reason is, the company needs to continue operating, buying inventory, and paying its employees. A short-term loan from a bank will help with those activities and ensure the company can continue operating and not face financial distress.
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Difference
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Both accounts receivable loans and a working capital loans have similar purposes as they have to deal with the day-to-day activities of a business. They also both focus on capital from external sources. The difference is that the accounts receivable loan focuses on increasing a company's cash flexibility by selling assets a company already owns while a working capital loan focuses on receiving debt capital.
Caution
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Depending on the company and the terms it can work out on an accounts receivable loan and the working capital loan, the working capital loan could be a better option. The reason is because with an accounts receivable loan, a company is giving access to its customers to a third party. Because the company that bought the accounts receivable earns a return on collecting the accounts receivable as fast as possible, the company may get aggressive and hurt the relationship between the selling company and its customers, which may lead to customers not doing any repeat shopping with the company again.
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References
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