Accounts receivable are a critical part of a business's financial health. They represent the money owed to a business by its clients and customers for goods and services that have been provided. While accounts receivable can help improve cash flow, they can also create significant financial gaps if clients are slow to pay. One solution to this problem is to sell accounts receivable, also known as accounts receivable factoring. Here is a guide to selling accounts receivable and what you need to know.

What Is Accounts Receivable Factoring?

Accounts receivable factoring is a financing solution that allows businesses to sell their accounts receivable to a third-party financing company, known as a factor. The factor will pay the business a percentage of the accounts receivable value upfront, usually around 70% to 90%, and then collect payment from the clients directly. Once the client pays the invoice, the factor will deduct its fees and interest before releasing the remaining balance to the business.

Why Sell Accounts Receivable?

Selling accounts receivable can help businesses improve their cash flow and reduce the risk of late payments or non-payments from clients. It can also help businesses manage their accounts receivable more efficiently and focus on their core business operations. Additionally, selling accounts receivable can be an alternative financing solution for businesses that may not qualify for traditional bank loans or lines of credit.

Steps to Sell Accounts Receivable

Find a factor: The first step in selling accounts receivable is to find a reputable factor that specializes in your industry. Factors may have different terms and rates, so it's essential to compare different options and find the best fit for your business's needs.

Apply for accounts receivable factoring: Once you've found a factor, you'll need to complete an application and provide information about your business, your clients, and your outstanding invoices. The factor will evaluate your creditworthiness and the creditworthiness of your clients to determine if you're eligible for accounts receivable factoring.

Get approved: If you're approved, the factor will provide you with a factoring agreement that outlines the terms and conditions of the financing solution, including the percentage of the accounts receivable value that will be advanced upfront, the factor's fees and interest rates, and the repayment terms.

Sell your accounts receivable: Once you've signed the factoring agreement, you can start selling your accounts receivable to the factor. The factor will advance you a percentage of the accounts receivable value, usually within 24 hours, and collect payment from your clients directly.

Receive funding: You'll receive the cash advance from the factor, which you can use to improve cash flow, pay bills, or invest in your business.

The client pays the invoice: When the invoice is due, your client will pay the factor directly. The factor will deduct its fees and interest from the payment and then release the remaining balance to you.

Selling accounts receivable can be a good financing solution for businesses that need to improve their cash flow and reduce the risk of late payments or non-payments from clients. However, it's important to understand the terms and conditions of the financing solution and find a reputable factor that specializes in your industry. If you're considering accounts receivable factoring, be sure to compare different factors and their terms to find the best option for your business's needs.

Sencha can help you with your accounts receivable financing journey through our AI-based engine. If you’re considering another type of financing, let us help you weigh your options.

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