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Are Accounts Receivable an Asset?
Are accounts receivable an asset? What formula can be easily used for valuating accounts receivable? These are common questions for AAB and the answers may surprise you. The real question is, do banks and lenders consider accounts receivable an asset?
The answer is yes, partially and no. The main factor in valuating accounts receivable is the age of the accounts. As accounts age the percentages drop substantially. Depending on the industry most lenders do not place any asset value on accounts that are over 6 months overdue.
How do lenders place a value on Accounts Receivable
Lenders will use different percentages when valuating accounts receivable according to the industry involved. Percentages will vary from lender to lender but are basically in the same range. Percentages are based on the standard recovery percentages on an average portfolio of accounts receivable.
Here are the average collection recovery statistics based on age for Accounts Receivable :
- Due Date 94.9%
- 30 Days Past Due 89.9%
- 60 Days Past Due 81.3%
- 90 Days Past Due 69.6%
- 6 Months Past Due 52.1%
- 9 Months Past Due 39.1%
- One Year 22.8%
- Two Years 9.3%
As you can see, the value of an accounts receivable deteriorates at a rapid rate. After 6 months the asset value of an accounts receivable drops almost in half. As a rule, lenders do not place any asset value on accounts that are over 6 months old. There are industry exceptions but in general this is the cutoff point when valuating accounts receivable as an asset.
Lenders will refine the percentages above based on the industry, and their experience in that industry, when valuating accounts receivable as an asset.
Using Accounts Receivable as security on a loan
Based on a similar formula above a lender will analyze and place a value on your accounts receivable as an asset.
Obviously the more up to date an accounts receivable portfolio is, the higher its value as an asset. Prior to having a lender evaluate your accounts receivables as an asset, be sure to clean up delinquent accounts.
If you need help with the cleanup, consider AAB. Give us a call or schedule a free consultation on accounts receivable as an asset.
