Eligible receivables: Overview, definition, and example
What are eligible receivables?
Eligible receivables refer to the outstanding amounts owed to a business by its customers that meet specific criteria for being considered collectible or acceptable for financial transactions, such as securing a loan or for factoring. These receivables are typically expected to be paid within a certain period and are considered to be of good quality, meaning they are not overdue, disputed, or in default. Eligible receivables are often used by businesses to access financing, such as through a line of credit or factoring, where the business receives an immediate cash advance based on the value of the receivables.
For example, a business may have invoices due from customers within 30 days, and those invoices would be considered eligible receivables if they are not past due or disputed.
Why are eligible receivables important?
Eligible receivables are important because they represent a source of cash flow for businesses. Companies often use these receivables as collateral for loans, or they may sell them to a factoring company in exchange for immediate cash. By identifying eligible receivables, businesses can determine the amount of financing they can secure or the value of assets they can liquidate. For lenders or factoring companies, ensuring that receivables are eligible helps reduce the risk of non-payment and ensures that the business has a reliable source of funds.
For businesses, eligible receivables are crucial for maintaining liquidity, managing working capital, and meeting short-term financial obligations. For lenders or financial institutions, determining eligibility helps protect their investment by ensuring they are dealing with reliable, collectible receivables.
Understanding eligible receivables through an example
Imagine a company that has issued invoices to customers, and those invoices are due within 30 days. The company wants to factor some of these receivables to raise cash. The factoring company will review the invoices to determine which ones are eligible receivables. If the invoices are not past due, are not disputed, and come from customers with a history of making payments on time, they are considered eligible. The factoring company will then offer the business a cash advance based on the value of the eligible receivables, allowing the business to meet its immediate cash flow needs.
In another example, a business applying for a loan might use its eligible receivables as collateral. The lender will assess the receivables to ensure they meet the required criteria—such as being unpaid for less than 60 days and not being under dispute—before agreeing to the loan.
An example of an eligible receivables clause
Here’s how an eligible receivables clause might appear in a contract or loan agreement:
“For the purpose of this Agreement, eligible receivables shall mean accounts receivable that are due within 60 days, are not in dispute, and have been verified as collectable by the Borrower’s accounting department. Receivables older than 60 days or those that are subject to any dispute will not be considered eligible.”
Conclusion
Eligible receivables are important for businesses seeking to secure financing, whether through loans or factoring, as they represent accounts that are likely to be paid and can be used as collateral. By identifying and defining what constitutes eligible receivables, businesses can improve their cash flow and gain access to necessary funding. For lenders or factoring companies, understanding and assessing eligible receivables helps reduce the risk of non-payment and ensures that the business is using reliable, collectable assets.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.