The most common reason a business sells their accounts receivable (besides the obvious need for cash flow) is that they’re not able to access other sources of financing. Maybe they’ve been turned down for a small business loan or a business line of credit.
These businesses are often dealing with rapid growth, but their profits haven’t caught up with their expenses. The owners and/or the business itself may have challenges with creditworthiness. Or the demands on their finances are immediate and waiting weeks for loan approval from a finance company isn’t an option.
Some factoring companies can provide payments to businesses within a few days of applying, making it a quick way to get some cash flowing in.
Factoring is the same as selling receivables. A business chooses which unpaid invoices they want to sell, applies to a factoring company with information about the customer with the outstanding invoice, and the factoring company pays out 80% to 90% of the invoice within about a day.
Not every customer invoice will be approved for factoring. If that business has poor credit, or the factoring company determines the risk of collecting the invoice to be too high, they can decline to finance the invoice. But for invoices that are approved, the process is fairly smooth.
When the invoice is due, it’s paid to the factoring company. They take a factoring fee (agreed on in advance) and then pay out the remainder of the invoice.
One of the advantages of factoring is that it doesn’t require the business with the cash flow needs to have good credit or to provide financial statements or disclose any bad debt. Rather, it’s the customer owing the invoice who has their credit checked.
Any business considering selling receivables must sell their products/services to other companies (B2B), have customers with good credit ratings, and generally show at least $5,000 in monthly sales.
A lot has to do with the invoice factoring company and the factoring process they use. Some operate directly with your customers and act as a professional liaison between you and your customers. Others use third-party vendors to work with customers, and conduct themselves in unprofessional and even harassing manners.
Factoring companies conduct various levels of credit checks into each company they agree to purchase receivables from. The more aggressive checks can impact your customers. Most companies will require at least some information directly from your customers—including your commercial clients.
No. Accounts receivable financing (also known as invoice discounting and assignment of accounts receivable) is a financing option like getting a bank loan from a lender to cover outstanding accounts receivables. You’ll pay a fee as well as a high-interest rate on the amount you borrow, and the receivables financing is labeled as a debt that’s put onto your financial statement. You'll also be on a strict payment terms agreement.
Selling receivables is not considered a debt (whether you're a small business or a large corporation), and you only pay a fee that is set out before an agreement takes place.
When you sell a receivable, the factoring company takes on the risk of collecting the invoice.
It’s entirely up to you how you use the cash received from selling receivables. Common immediate needs include staffing needs, paying taxes, purchasing supplies, covering overhead during lean months, and even making credit card payments. It used to be most common with seasonal companies. But now, with the pandemic causing unexpected shutdowns, many more businesses are facing immediate cash flow needs.
We’ve seen businesses from construction contractors to manufacturing facilities to technology companies use accounts receivable factoring to keep their businesses operational and pay for almost any expense you can imagine.
But there’s another way to solve cash flow problems. It’s called digital net terms. With advancements in technology, you can use a company like Resolve Pay to confidently offer net terms to their customers (giving them 30, 60, or 90 days to pay), while receiving a cash payment from Resolve for up to 90% of the invoice within a day.
When your customers are approved by Resolve, you can count on your invoices to get paid quickly, eliminating the headaches of managing credit decisions and accounts receivable.
Selling receivables or factoring is certainly a traditional way of solving cash flow problems. But it’s not the only way. With the unique information that Resolve offers, businesses are offering better net terms to their customers, are closing new buyers faster, and building loyalty with existing customers through 0% APR terms. In a competitive market, this can be the difference between barely surviving and thriving.
Businesses work hard to make sales, close contracts, and serve their customers. Accounts receivable are a legitimate current asset, can create working capital, and are an indication that your business can grow and serve even more customers.
It’s time to put your accounts receivable to work for you and create opportunities for more growth and success.