Selling Accounts Receivable to Obtain Short-Term Funds

One of the challenges of having to offer net-30 to net-90 terms to commercial clients is that it can affect your cash flow. Problems often occur if your company has low reserves or if you just made a very large sale. Although large sales can be good, they affect cash flow because you have to incur all delivery expenses ahead of time and then must wait up to 90 days for payment.

The simple solution is far from perfect

The simple way to fix this problem is to offer your clients a discount for early payment. Basically, you give your clients a discount off their invoice – usually 2% – as long as they pay within 10 days. This solution can work well in some instances but does not provide stable cash flow.

Most discounts are offered by using this (or similar) notation on the invoice “2%/10 – net 30”. It gives the client the option to pay early and get the discount. However, there is no guarantee they will pay early. They can still pay in 30 days. Furthermore, some less-than-ethical clients may abuse this offer by taking the discount – but still paying in 30 days, anyway. Unfortunately, this abuse is common and complicates the business relationship with the client.

Sell your accounts receivable to improve cash flow reliably

A better way to fix this problem is to sell your accounts receivable to a factoring company. This type of financing improves your cash flow immediately by providing you with funds for slow-paying invoices. Use these funds to pay for important business expenses such as salaries and suppliers. It can also help improve cash flow if you just made a big sale and need short-term financing.

When used correctly, accounts receivable financing can improve your working capital reliably. It allows you to operate your business and take on new clients without having to worry about extending net payment terms. The line also adjusts to your growing sales and may be increase as needed.

How does accounts receivable financing work?

The financing process is fairly simple. Account setup takes five to ten business days. Subsequent fundings can be done within a business day of submitting approved receivables.

Receivables are usually funded by selling them to the factoring company in two installments. The first installment, the advance, covers 80% – 90% of the gross value of the receivables. The funds are wired to your account shortly after the finance company processes the invoices. The remaining 10% – 20%, less the service fee, is rebated to your company as soon as your clients pays their invoices on their usual schedule. To learn more, read “How do Factoring Companies Buy Accounts Receivable?

Negotiate a short-term solution

Generally, most factoring companies like to enter agreements that last one year and have minimum volume commitments. However, a trend towards short-term agreements that have few – if any – minimum commitments makes accounts receivable financing an ideal short-term financing alternative.

Be upfront about your need for short-term funding and discuss it with the commercial factoring company early in the negotiation process. This approach enables the factoring company to tailor a proposal to your needs. Many finance companies now offer short-term agreements of 90 to 180 days.

Short-term vs. long-term

One common mistake that clients make is underestimating their cash flow needs. Most cash flow shortages can’t be fixed completely with a single financing transaction. Unless the root cause of the problem has been fixed, if you stop financing invoices the problem may return.

Instead, take the time to determine why you have cash flow problems. Then, build an adequate financial reserve so your company is in a better position to offer net terms to clients.

Do you need accounts receivable factoring?

We are a leading factoring company and offer short-term receivables financing at competitive terms. For a quote, fill out this form or call us toll-free at (877) 300 3258.