The answer to that question is simple: more money. Selling receivables to another company will improve the company’s cash flow. No business will be successful if its cash flow is suffering. The process will increase their working capital quickly and without much fuss. Keep reading for more information on this common practice.
As one of the industry leaders, TAFS assists trucking companies to increase cash flow with factoring rates as low as 2.49%, business loans and 1-Hour Advance options.
What are receivables?
Sometimes called accounts receivable, these are debts that are owed to a company for goods or services that have been rendered. While the customer has already received the product, the company has yet to be paid.
There are definite pros and cons when selling receivables. On the upside, funding usually happens quickly which helps remedy short-term cash flow issues. Also, obtaining a line of credit doesn’t require any asset collateral. Lenders will usually collect what they’re owed directly from the customer invoices so there’s no extra paperwork for you to process.
On the other hand, your lender may base your rate on your clients’ history of making payments by their due date. This may cause some clients to believe that you rely heavily on funding from receivables because your cash flow is low and that may cause them to be hesitant about doing long-term business with your company.
What does it mean to sell receivables?
Selling receivables is a common practice for companies no matter their size or length of time they’ve been in business. You would need to contact a factoring company and complete their application process. Once you’ve been approved and signed the contractual agreement, the factoring company then purchases and verifies your invoices. You will then typically receive 95% of the invoice value.
4 reasons why a company would sell receivables
So why would a company sell receivables to another company? There are a number of reasons a company would take this route and we’ll go over four motives behind that are usually the reason for the action.
Time
Once you sell receivables you don’t have to concern yourself with the tedious task of following up with customers who haven’t yet paid their debt. This is all done by the factoring company which will now save you time since they are the ones contacting clients to collect late payments.
You continue to process your orders normally and send copies of your invoices to the factoring company. Once the factor purchases the invoices, you’re extended a line of credit, giving you access to capital. After your client pays the factoring company, the invoice balance less the factoring fees are paid to you.
Cash flow
Your company’s cash flow will improve because you’ve sold your invoices to obtain quick access to cash. As the factor purchases your invoices, funds are made available for you to access as needed. This process is typically done in two steps.
The first step is the advance payment, which usually covers 80% of your invoice value. This is the money made available once you submit the invoice. The other 20%, less any factoring fees, is paid once your client makes their payment to the factoring company.
Selling receivables also eliminates the 30-90 days many companies have to wait to receive payment. The process ensures you’ll have cash available to take care of any business obligations.
Credit rating
Selling receivables to a factoring company comes with its own benefits and cost-saving services. The factor will perform credit checks on your customers to reduce the risk of non-payment. If your clients have a good repayment history you may get a better factoring rate.
Your business credit will also increase as you now have a stable cash flow to make payments on time. Your ability to repay credit will only increase your creditworthiness for other business opportunities.
Risk reduction
Once the factoring company purchases your invoice, they now assume the risk involved and you can rest easy knowing you’ve already been paid. Your balance sheet will show the invoice as a current asset and this liquid asset can be used as collateral to secure a loan to help the company meet short-term obligations.
If the client doesn’t pay, your cash flow is not directly impacted and your credit score won’t suffer. The influx of cash will keep your operations running smoothly.
Selling receivables vs factoring
There are important differences between accounts receivable financing and factoring with the most significant being how the payments for invoices are collected. When it comes to accounts receivable invoicing, the company maintains control and ownership of its receivables. That means you continue to contact clients and they’re unaware that you’ve secured a loan using their invoices, and you still collect the full invoiced amount from the customer.
Invoice factoring gives your business an advance based on the number of your outstanding invoices. From there, the collection of payment is out of your hands. The factor now contacts clients for payment and they receive a fee for their hard work. That means you are not paid the full amount of the invoice by the factoring company.
Accounts receivable financing and selling receivables are both great alternatives to bank loans. This is especially true for small businesses that may need to secure cash quickly to meet business needs. There is no lengthy waiting period for approvals. Getting approved is also much easier for accounts receivable and factoring as the process is much different. Instead of having your credit checked, the credit of your clients is the determining factor for approval. You don’t have to reveal any debt you may have as approval is based on whether or not your customers pay on time.
FAQ
Factoring is the term used when a company sells its receivables.
No, the major difference is you are still responsible for collecting any debts with accounts receivable financing. With factoring, a third-party company purchases your invoices, assumes the risk, and collects the payment.
This is an excellent alternative for businesses that may not be able to secure a bank loan but are in need of cash flow.
