Selling Accounts Receivable to Finance Your Business

Most companies that sell products and services to commercial clients have to offer net-30 payment terms. These terms give clients up to 30 days to pay an invoice. Unfortunately, you don’t have a choice in the matter. Most large companies demand payment terms as a condition of doing business. Providing terms can create financial problems if your company cannot afford to wait for payment. These problems can leave you unable to pay salaries, vendors, and other critical expenses.

Cash flow problems due to slow-paying invoices affect companies of all sizes, especially those that do not have sufficient reserves or are growing quickly. If not managed correctly, these problems can grow and impact your ability to run the business. Fortunately, a couple of options can help you deal with this problem.

Early payment discounts

If the gap in your cash flow is not too big, you may be able to improve your cash flow by offering early payment discounts to your clients. These agreements are simple and fairly effective. Your company offers a discount – usually 2% – to the client. In exchange, the client pays the invoice in ten days or less.

Early payment discounts have some limitations. First, they are optional. Your client can choose to pay early and take the discount or pay their regular price on their usual schedule. Therefore, early payments don’t provide predictable cash flow. Second, they can create disputes if clients decide to take the discount and, yet, still pay on their regular schedule. Unfortunately, this scenario happens often. Lastly, clients may be inclined to negotiate further reductions once your contract with them is up for re-negotiation.

Improve cash flow by selling receivables

A better way to improve your cash flow is to use accounts receivable factoring. This type of financing works by selling your accounts receivable to a finance company in exchange for an immediate payment. This solution provides your company with immediate funds and improves your liquidity. You can use these funds to pay for company expenses such as wages, vendors, rent, and other expenses.

How to sell receivables

The process of selling your receivables to a finance company is straightforward. Most finance companies buy your accounts receivable in two installments: the advance and the rebate. The advance is wired to your bank account shortly after you sell your invoices to the factoring company. It covers 70% – 90% of the gross value of your invoices. The percentage varies based on your industry. The 10% – 30% that was not initially advanced is rebated (less a service fee) once your invoices are paid by your clients.

Benefits of selling receivables

The most important  advantage of using commercial factoring to finance your company is that your cash flow improves quickly. Furthermore, this solution can provide you with predictable cash flow, which allows you to run your company more effectively. Additionally, selling receivables provides you with a flexible financing option that increases as your sales grow. This flexibility makes factoring an attractive alternative to companies that are growing quickly.

Qualification criteria

This type of financing is available to companies of all sizes, including startups. For your business to qualify for accounts receivable financing:

  • Your customers must have good commercial credit
  • Your customers must pay invoices in net-30 to net-90 days
  • Your accounts receivable must be free of liens or encumbrances
  • Your company must not have serious problems

Is selling invoices right for your company?

Usually, selling your invoices to a finance company will help you if:

  1. Your company has cash flow problems
  2. The cash flow problems are caused by slow-paying clients
  3. You plan to use the funds to pay for business expenses

Need receivables financing?

We are a leading accounts receivable factoring company and can provide factoring at competitive terms. For a quote, fill out this form or call us toll-free at (877) 300 3258.