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The meaning of accounts receivable loan is a quite apparent in the name itself - a business can take out or obtain a loan against its accounts receivable or the money that is owed to the company. In other words, it essentially means that one is borrowing money from oneself only. It is a tried and tested method of getting accounts receivable finance when one needs to obtain money quickly. This method of obtaining a loan isn’t the same as the traditional method of obtaining a bank loan because the latter is more complicated and charges a higher rate of interest as well. In case of an unfavorable economic climate, it would be harder to obtain traditional bank loans and hence it would make more sense to go for accounts receivable finance instead. Today, the option of accounts receivable loan is quite popular and a lot of companies rely on these. However, have you ever wondered how it all started? Let us take a look at the history of this kind of financing method. It is certainly one of the oldest financial practices meant for business owners or merchants who face difficulty trying to make ends meet in their venture. The practice of accounts receivable loan dates back to pre-colonial England when merchants would engage in the practice of selling their invoices for the purpose of obtaining cash. Merchants would usually sell them to finance trade ventures and pay workers. During that time, the merchants ran minor operations and so it was necessary for them to evaluate the credit worthiness of their prospective buyers before giving them accounts receivable finance. The same practice exists today as well because factoring companies evaluate the credibility of their prospective clients before finalizing the deal. Back in those days, the merchant was unable to obtain financing unless he had obtained firm commitments from large retailers and distributors. Similarly, today, smaller companies vie to sell their goods and services to bigger and more credit worthy organizations. This early form of accounts receivable loan or accounts receivable finance paved the way for what was to become a highly invaluable and useful source of financing during the late nineteenth and the early twentieth century. Who would have thought that such a simple but ingenious pre-colonial practice would evolve like this? Subsequent to the Civil War in the US, the world saw the emergence of new markets along with the development of ‘cutting edge technology’. Cotton gin was invented during the year 1793 and this invention enabled merchants to manufacture textiles in mass volumes. However, there was a drawback namely transportation. However, during the year 1870 that changed as well and the merchants could engage in their business successfully without any hindrance in case of transportation or technology. Thus, accounts receivable finance or accounts receivable loan became popular once again. It was during this time when the accounts receivable finance soared in terms of popularity once again that banks and other financial organizations began to come up with their own versions of accounts receivable loan. These ‘experiments’ of the banks and other financial organizations proved to be successful because people actually appreciated them. Improvements were continuous in this context and today, the number of factoring companies or independent merchants have multiplied a hundred-fold. Today, such loans are indispensible for processes like expansion or promotion of a business. While everyone knows of the various ways of acquiring accounts receivable finance very few are truly aware of how it all started. The concept of accounts receivable loan can be traced back to the colonial era and is one of the few things from that period which have endured till today.
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