An account receivable is the money for goods or services that customers are yet to pay. Accounts receivable are vital to running a business well, contributing to increased cash flow. However, delays in accounts receivable can lead to significant financial challenges for a company.
The best way to avoid money problems in your business due to customers’ delayed payments is to sell delayed invoices to a third party in exchange for cash.
This means you give your account receivables to a company that pays you immediately while the company waits for your customer to pay back. The act of selling account receivable is called Factoring.
Account Receivables Factoring
Account receivable factoring is a financing solution where businesses sell their accounts receivable to another financing company known as Factor.
The factor is an intermediary agent (a middleman) that provides cash or financing to a company by buying their account receivables. The factor pays the company the money they are being owed upfront, and then they, in turn, collect the money directly from the consumer. This process of buying and selling between business and Factor is called Factoring.
The factor is more concerned with the creditworthiness of the invoiced party than the company from which it bought account receivable, thereby setting terms and conditions that fits their different standard.
Why Sell My Account Receivables?
Selling your account receivables is a good investment for your company. It is very efficient for increasing the available money that can be used for business growth while removing the need for debt.
A company that sells its account receivables gets an immediate cash injection, which can fund business operations and improve working capital.
Selling account receivables is an alternative solution for businesses that do not qualify for bank loans.
Selling your account receivables can allow your company to convert goods/service values to cash in an emergency. You don't need collateral to sell your account receivables since the factor gives you immediate money in exchange for money they will get later.
Selling account receivables saves you the stress of running after clients to pay your debt, as the factor takes on that responsibility. It also helps your business manage customers with poor payment histories without hurting your business because you no longer have to wait for them.
Steps To Selling Your Account Receivables
Before selling your account receivables, there are step-by-step procedures to follow to achieve a successful sale.
- Find a factor: The first and crucial step is finding a factor, as no transaction can happen without a factor. You must find a reputable factor based on your business industry.
Factors have different terms and conditions, so it will be advantageous to weigh them thoroughly before selecting your factor to partner with.
- Apply for Factoring: After deciding on the Factor that fits your business, it's important to apply by providing information about your clients, business, and outstanding invoices. The factor will then evaluate the creditworthiness of your client to see if they are the best fit for them to work with.
- Approval: After your client has been evaluated thoroughly, you are then provided with the terms and conditions of the factoring company to sign that you agree with the terms and conditions provided. These terms can Include the percentage of the accounts receivable that will be paid upfront, the factors fee, commission, interest rate, and repayment terms.
- Sales: After signing the agreement and you are approved, Selling your account receivables is the next step. The factor will pay you the agreed percentage of the receivable upfront, usually within twenty-four hours, and collect the money directly from your clients.
- Funding: After due process, the factor will pay you for the invoice, and you can use the cash for your business cash flow management and keep your working capital running.
- Client's payment: After some time, your client pays the factor directly. The factor removes their fees and interest from the payment and releases the balance to you.
TYPES OF FACTORING
There are several types of factoring, but there are only two major types. They include:
- Non- Recourse
Recourse: Recourse factor is the most common type of invoice factoring. After due process is followed and the business successfully sells its accounts receivable, the factor tries to get the money directly from the client. In recourse factoring, if the client doesn’t pay up eventually, the business bears the loss and pays the factor back.
Non-Recourse: Non-recourse is a situation where the factor takes sole responsibility for the risk behind buying invoices from businesses. However, some Non-recourse factoring only covers specific situations, in which case the business bears some loss.
Other types of factoring include Full-Service Factoring, Domestic factoring, Export Factoring, Spot factoring, Regular Factoring, Maturity factoring, Advance Factoring, Disclosed factoring, Non-disclosed Factoring, Bank Participation Factoring, Limited Factoring, Supplier Guarantee Factoring, and Reverse Factoring.
The type of factoring you choose depends on your customers and business niche. Choosing the best fit for you, your business, and your customer is advisable.
Selling accounts receivable is an excellent financial solution for businesses that want to manage their cash flow, working capital, and growth. It reduces the risk of late or non-payment of clients.
However, it is crucial to understand the terms and conditions of the financing solution and find a reputable factor knowledgeable in your business niche. Before your final decision, compare different elements, terms, and conditions, and find the best option that fits your business.