As with any financial option available to a small business in need of cash, choosing to sell account receivables is an important consideration. It is not always the right answer for every business, but for most companies with a healthy, growing business it is a very viable solution for short-term cash flow issues.
There are several components or considerations when trying to decide if making the move to sell account receivables is right for your business. Taking the time to consider the benefits and any potential drawbacks to this option is critical.
The Basics of the Process
A company that purchases your account receivables is called a Factoring company.
You sell account receivables, in the amount you choose to the factor, which then pays you a percentage of the value, typically up to 80%. This money is transferred into your account in days, giving you the cash on hand to make payroll, buy supplies, hire new employees, or meet financial obligations.
The factor holds a reserve amount, typically 20% and, once the invoice is paid by your customers to the factor, the fee is deducted for the service and the residual amount is sent to your account.
Not a Loan
It is important to realize that when you sell account receivables you are not obtaining a loan. The factor assumes responsibility for collection on the account receivables. This means you have the cash without the need to go through a business credit check or to complete a lengthy loan process.
There is also no repayment and no interest, so the costs you will carry for the service are final when the invoice is closed.
Managing AR
Another benefit to going the route to sell account receivables is to free up your business staff. They are no longer need to keep up with invoices, contact your customers if invoices are reaching their payment date, or to deal with trying to collect if payment is late.
This is a cost saving benefit to your company offered from top factoring services. Additionally, if there is a problem with payment, the factor, not your company, will address the issue as they now hold the accounts receivable.
It is important to think of the process to sell account receivables as simply receiving early payment on invoices, even if it is from the factor and not your client. With a steady stream of customers and ongoing income from revenue, this is a good option for small businesses to consider.
