What does selling accounts receivable mean?
Selling accounts receivable, also known as factoring or accounts receivables factoring, is a financial transaction where a business sells its unpaid invoices to a third-party company, known as a factor. This is done to receive immediate cash flow in return for a factoring fee which the factor charges.
Here’s how it works:
- The factoring company advances a percentage of the invoice value: Instead of waiting for customers to pay, you receive a significant portion of the invoice value upfront from the factoring company, typically around 70% to 90%.
- Factoring company collects the payments: The company then takes over the responsibility of collecting payments from your customers. Once the customers pay, the factor remits the remaining balance to your business, minus a fee for their services.
When the factoring company provides immediate liquidity, it comes at a cost which is known as the factoring fee. The fee charged by the factoring company can vary based on the risk associated with the receivables, the creditworthiness of the customers and the volume of invoices sold.
For business professionals and founders, selling accounts receivable can be a strategic move to maintain cash flow without taking on additional debt.
Why companies sell receivables?
Companies choose to sell their receivables for several reasons. Here are some of the main ones.
- Immediate cash flow: Businesses often face cash flow challenges, especially when dealing with low-paying customers/clients. Selling receivables provides immediate access to funds, enabling them to meet payroll, purchase inventory and cover other operational expenses.
- Risk management: By selling receivables, businesses can transfer the risk of non-payment to the factoring company.
- Business growth: Businesses looking to grow or invest in new opportunities may not have the luxury of waiting 30, 60 or 90 days for invoice payments. Selling receivables for cash allows them to reinvest in the business more quickly which fuels their growth.
Compare Invoice Financing Quotes Today
Who do you sell accounts receivable to?
Although the most common organisation for purchasing receivables is the factoring company, however, there could be 2 other partners as well.
- Invoice discounting firms: These firms provide funds on the basis of short-term borrowing. In this case, however, the business is responsible for collecting payments.
- Online invoice marketplaces: These marketplaces provide quick cash on transparent terms.
Benefits of selling accounts receivable
When you sell different types of invoices to a third party, you gain multiple benefits.
1. Improved cash flow
Selling your accounts receivable provides immediate access to funds that would otherwise be tied up for 30–90 days. This influx of cash enables your business to:
- Cover day-to-day costs such as payroll, rent and utilities.
- Invest quickly in growth projects and market expansions.
- Overcome seasonal fluctuations with greater ease.
2. No additional debt
Unlike traditional loans, selling accounts receivable is not borrowing money but advancing funds based on your invoices. This keeps your debt-to-equity ratio low, making your financial statements more attractive to investors.
It also preserves your existing credit lines and may improve your credit profile over time.
| Accounts receivable financing | Accounts receivable factoring | Selling accounts receivable |
|---|---|---|
|
Funding speed |
Typically slower. |
Faster. |
|
Debt obligation |
Creates a liability. |
Nor debt incurred. |
|
Credit requirement |
Requires a good credit history. |
Less reliant on credit and more on customer creditworthiness. |
3. Streamlined operations
Since the factoring company assumes the responsibility of collecting payments from your customers, it frees up your time to focus on the core operations of your business while experienced teams manage collections tactfully. This means less time and resources need to be spent on tracking and collecting payments.
4. Ability to offer competitive payment terms
With improved cash flow, your business can afford to offer more favourable payment terms to customers. This results in increased client loyalty which encourages large orders and repeat business. As a result, your revenue increases.
5. Quick & accessible financing
The process of selling receivables for cash is often faster and more accessible than obtaining traditional loans because:
- Approval is typically based on the creditworthiness of your customers and not your business history.
- Funds can be received within days.
- Financing grows in line with your sales, which provides support as your business expands.
Cons of selling accounts receivable
Now, can there be any disadvantages of selling accounts receivable for cash? Let’s find out.
1. Costly fees
Factoring companies charge a factoring fee that can be expensive for some businesses. Usually, it’s 1% to 3% of the total invoice value but some risky businesses get a rate of 5% as the fee as well.
Now, it may seem small, but when added over time, it reduces overall profitability especially for businesses with tight margins.
2. Impact on customer relationships
The other con of selling receivables is that a third-party company takes over your receivables and your customers may feel uneasy and confused about this change. This could potentially strain your relationships, especially if the factor is more aggressive in collections.
3. Loss of control
Selling your accounts receivable means handing over control of a portion of your cash flow. This could limit your flexibility in managing your finances and responding to unexpected opportunities.
Common accounts receivable problems
The final decision of whether to sell your receivables or not also depends on the problems that occur normally when collecting payments from your customers.
See how many of these problems you are facing and analyse if selling your receivables will solve them.
- Not being confident: Some account representatives of your business might be unaware of the terms and policies. The customer can take advantage of this and extend the time of payment.
- Difficulty in reaching accounts payable: Your clients or customers are being hounded for payment all the time, so it’s no surprise that they try to dodge your calls regarding the payment. Make sure you have someone else who’s responsible for the invoices.
- Excuses from the customers: Some customers may remark that they weren’t aware of the payment terms. This is why it’s essential to have them sign the terms before finalising the deal.
Sell Your Accounts Receivable Easily with ComparedBusiness UK
ComparedBusiness helps you in selling your accounts receivable to factoring companies. We link you with top providers in the UK. Just submit your requirements in less than 2 minutes and we will get things going. Get ready to receive immediate payment for your unpaid invoices within a span of few days.
Yes, accounts receivable can be sold to a third party, typically a factoring company. This process is known as accounts receivable factoring and it allows businesses to receive immediate cash by selling their outstanding invoices at a discount.
Payable financing is a type of invoice financing that businesses get against their supplier’s unpaid invoices. Receivable financing is the type of financing that borrows money against outstanding invoices of the customers.
Accounts receivable financing involves borrowing funds as a loan against your invoices, while AR factoring involves selling your invoices to a third party to get cash in advance. Both methods incur a fee that the lender (or factoring company) charges to the businesses
