Can I Sell My Invoices To Improve My Cash Flow?

Small business owners are often challenged when a large customer requests net 45-day credit terms (i.e., the option to pay an invoice up to 45 days after delivery). As a business owner, you want to offer credit terms because it improves your ability to sell to large clients. However, offering credit terms can adversely affect your cash flow, especially if you can’t afford to wait up to eight weeks for payment.

These conflicting interests pose a dilemma for entrepreneurs: you can grow your business and take clients on credit, as long as you are willing to risk your cash flow. This decision is not easy, especially for small business owners and startups without financial reserves.

However, there is a way to offer credit terms without risking your cash flow. You can finance your net-30 to net 60 term sales by selling your accounts receivable to a company that buys invoices.

Why would a company sell their accounts receivable?

Most entrepreneurs are not aware that they can sell their accounts receivable in exchange for immediate payment. However, this business financing alternative is commonly used by large companies and serves a very simple, but critical, purpose: it reduces the time between providing a service (or selling a product) and getting paid. This strategy improves your cash flow and allows you to meet expenses.

Also, companies finance their invoices because this type of funding is flexible and does not have the qualification requirements of a conventional business loan. These aspects of accounts receivable financing make it an attractive option for companies with great potential but without a lot of tangible assets.

How does it work?

The process of arranging for accounts receivable financing is relatively simple. First, establish an agreement with a company that buys invoices, usually known as a factoring company. The factoring company sets up the process by which they purchase your invoices as soon as your client has accepted your product/service.

The transaction is usually structured in two payments. The first purchase payment covers about 80% of the value of the invoice and is deposited in your account after your client receives your services/products. The remaining 20%, less the discount fee, is rebated when your client pays in full.

Most companies choose to sell their invoices on a regular basis, thereby improving cash flow, providing predictability, and strengthening their position to take on new opportunities. You can learn more about factoring by reading this case study.

Can I sell any invoice?

One thing to clarify is that factoring companies do not buy bad debt or delinquent invoices. Instead, they finance invoices from companies who are good at paying on agreed upon terms. They perform this service by evaluating your client’s commercial creditworthiness through a credit bureau. If you have delinquent invoices, you will be better off working with a specialized attorney.

Also, you can only sell invoices unencumbered by prior liens and judgments. Keep in mind that most business loans will actually encumber your accounts receivables with a UCC lien.

How much does it cost?

Factoring companies buy your invoice at a discount over face value. The discount is based on a few criteria, including the creditworthiness of your clients, your billing methods, and your industry. In general, 30-day fees range from 1.5% to 3%. Fees are usually prorated.

How quickly can I get funded?

Most clients can get their first batch of invoices funded as soon as their account is set up. This process takes a couple of days. However, subsequent invoices can usually be funded on the same day, as long as they can be verified quickly.

Get a factoring quote

Are you looking to sell your invoices to a factoring company? We can provide you with high advances at low rates. For information, get an instant quote or call (877) 300 3258.