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Accounts Receivable Factoring
Business Financing
Is Selling Accounts Receivable Right for Your Business?
There’s more to business than just maintaining stable cash flow, but that doesn’t mean it’s not important! If your business needs working capital, you might be looking at all your options, including selling accounts receivable. As with any big decision, it’s important to have a thorough understanding of the pros and cons of this type of financing so that you can make an informed decision about whether or not selling accounts receivable is right for your business. In this article, we’ll cover the question of whether you should sell your receivables and what to look for when comparing companies that buy receivables – all so you can make the most informed decision for your business.
The Problem With Extended Payment Terms
Small businesses that sell their products and services to commercial clients often have to offer extended payment terms. These big businesses usually take 30 to 60 days to pay, but this period is longer for certain industries. (Oil and gas companies, can take up to 90 days (or longer!) for payment.) Waiting months to get paid has a significant impact on your cash flow. Research has revealed that 73% of small and medium businesses felt the pinch of late payments or stretched-out payment terms last year. And it’s not just a matter of tightening belts—about 40% of these businesses are teetering on the edge, facing the real threat of shutting down if things don’t change. This stark reality drives home just how crucial it is to keep that cash flowing smoothly. Even if you’re stuck waiting on payment, you still have to:
- Cover payroll
- Hire staff
- Buy or maintain equipment
- Purchase inventory
- Pay subscriptions, utilities, and other critical bills
And you might want to:
- Accept big projects to grow your business
- Enhance the balance sheet with cash-on-hand for potential investors
Of course, if you then have to deal with a late payment, the cost of collections can balloon. At the same time, it’s challenging to take advantage of early payment discounts when you are waiting for outstanding receivables. This cash crunch severely limits business growth.
On top of that, many small businesses struggle to secure a funding source such as traditional bank loans or lines of credit, leading them to explore alternative funding solutions.
Why Small and Medium Businesses Struggle to Get Funding
Most small and medium-sized businesses find themselves locked out of traditional lines of credit and other financing options, even when they have paying customers and a sound business plan – or, they’ve reached their limit on an existing line of credit. Some reasons why SMBs struggle to secure traditional financing include:
- Time in business. Banks often won’t approve small and medium businesses for business financing unless they have a proven track record of success — something that doesn’t come for a couple of years, at least. Interestingly, a mere 48% of small businesses fully meet their financing needs, a statistic that includes both those who successfully secure their desired funding and those who don’t seek financing due to adequate capital reserves.
- Time-sensitive business opportunities. Even if you have a solid track record, the process of securing funding from a business bank can take weeks or even months. The opportunity you needed the cash for may have passed by that time. Same goes for even simply raising the limit on your line of credit. It can take weeks to approve a modest credit increase, that’s if you meet the bank’s stringent requirements (and submit a pile of paperwork.)
- Asset collateral. Some forms of financing require collateral, giving up equity, or long-term commitment. These methods for getting cash flow funding fast can be risky, with convoluted contracts and hidden fees.
Small businesses need a way to access cash quickly without the stress and long-term commitments associated with traditional credit options.The good news is that today it’s easier than ever for small business owners like you to get the financing they need. How? By selling accounts receivable to a third party.
What Does Selling Accounts Receivables Mean?
Selling receivables is an alternative financing option commonly known as invoice factoring, receivable financing, or financing receivables. In a nutshell, invoice factoring is a type of receivables financing where you sell your accounts receivable (a.k.a., your outstanding invoices) to a third-party financing company, also known as a factor, at a discount. In return, the finance company provides you an advance payment of the value of the invoice, minus a fee, then works with your clients to collect payment according to the original invoice terms. It is a short-term financing option.
The Process of Selling Accounts Receivable
Once you are approved for funding, the receivable factoring process is simple:
Once you’re approved for funding, the receivable factoring process is straightforward. Take, for example, a $100,000 invoice:
1. Initial Purchase: The factoring company acquires your $100,000 invoice, verifies its details, and works with you and your client to ensure payments are redirected appropriately.
2. Advance Payment: Next, you receive an advance on the invoice value (often up to 100% with FundThrough), less a fee (fees will vary). For this example, let’s assume an 100% advance rate, with a fee of 3% per 30 days, equating to $97,000.
3. Client Payment: Your client pays the invoice amount of $100,000 to the factoring company according to the original net terms. You don’t have to worry about chasing down payments or managing the collections process.
4. Repeat as Needed: You can then repeat the process with additional customer invoices anytime to maintain a healthy cash flow.
There are two types of receivables factoring: recourse and non-recourse. Recourse factoring simply means your company must buy back any invoices the factoring company is unable to collect payment on. Selling accounts receivable without recourse means the factoring company assumes most of the risk of non-payment by your customers – however, this option is more expensive.
How Selling A/R Works with FundThrough
FundThrough was designed to streamline the process of invoice factoring, transforming it into a seamless experience. Leveraging a tech-powered platform, FundThrough simplifies each step of the process, from account setup to funding the invoice, ensuring that you can access the funds they need quickly and with easily. Here’s how it works:
Step 1: Account Setup: Begin by creating a new account within minutes or connect your existing QuickBooks or OpenInvoice account for added simplicity. At this stage, the FundThrough team will review your documents and invoices to ensure your business is eligible for funding.
Step 2: Invoice Selection: Upload your invoices directly or effortlessly sync them by connecting your accounting software. Our integrations with platforms such as QuickBooks and OpenInvoice streamline this step, ensuring quick processing of your funding request.
Step 3: Receive Payment: Once you’ve chosen your invoices for funding, we coordinate with your customer to verify them and direct the payment to FundThrough. Once approved, the funds will be in your linked bank account by the next day.
Step 4: Back to Business: After your customer settles the invoice with FundThrough according to the agreed terms, you have no more obligations. You’re all set to focus entirely on your business, with FundThrough ready to make future invoice payments quickly whenever you need additional funding.
Ready to sell your receivables?
Why Would a Company Sell Their Receivables? Here Are 4 Reasons
You might ask yourself, why would I sell my receivables? That’s a fair question. The reasons below are just some of the common reasons our clients tell us they choose to sell accounts receivable. Consider them in the context of your own unique situation to make a decision.
1. You need quick and easy financing for rapid growth (or anything else)
The right invoice factoring solution should provide a speedy way to apply for and receive cash. Thanks to AI, automation, and integration with accounting software, FundThrough eliminates the time-consuming paperwork and approval process associated with business loans and other financing options, speeding up your access to working capital.
2. You need flexible funding with no long-term commitments
You tap into cash only when you need it and choose the invoices you want to fund, when you want to fund. Take something you already have – unpaid invoices – and turn it into a tool for cash flow—all without committing to longer-term debt. Just make sure your factoring partner doesn’t require any long-term factoring contracts, or monthly minimum factoring volume.
3. You want funding without debt or dilution
Because factoring is not a loan, you aren’t adding any debt expenses to your balance sheet. Additionally, you aren’t giving away any equity in your business, so you remain in complete control of your company with this non-dilutive source of funding.
4. You want to avoid bank financing hassles
To secure a traditional loan or other bank financing for businesses, you’ll have to jump through hoops including a lengthy approval and application process. Banks also require you to have a certain credit rating or credit score in order to qualify for funding. Receivable factoring focuses on the creditworthiness of your customers, and many factoring applications can be completed in just a few minutes online. Getting approval for factoring in a matter of days is just one of the major benefits of factoring compared to applying for bank financing.
Ready to transform your unpaid receivables into working capital?
Why would a company sell their A/R to FundThrough?
Choosing to partner with FundThrough for selling accounts receivable unlocks a range of benefits, perfectly aligning with the needs of small and medium-sized businesses. Here’s why thousands of businesses opt for FundThrough:
Rapid Capital Access: Experience the speed of modern financing with FundThrough; we turn outstanding invoices into available funds in just days, fueling your business’s immediate cash flow needs.
Tech-Driven Efficiency: Leveraging cutting-edge AI and automation, FundThrough streamlines your funding experience, making it faster and hassle-free.
Flexible Funding Solutions: With FundThrough, flexibility is key. Access funds on your terms, without worrying about monthly minimums after your first funding.
Simplified Process: After initial customer setup, fund invoices in one click.
No Commitment After Invoice Payment: Say goodbye to binding long-term contracts that require you to get a certain amount of A/R advanced every month.
Full Invoice Funding: FundThrough stands out by offering 100% advance rates, minus a transparent fee, ensuring you get the maximum value from your invoices.
No Hidden fees: Transparent, upfront pricing is detailed further on our pricing page.
Empowering Growth: Unlock the potential to tackle larger projects and drive substantial growth, all through timely access to working capital.
Unlimited Funding Potential: Your funding capacity is as limitless as your invoicing, with no caps on the amount or number of invoices you can get funded.
Personalized Support: Benefit from a dedicated account manager, offering tailored support to ensure your business is well-capitalized.
Seamless Software Integration: Effortlessly pull invoices for funding with our integrations in popular accounting platforms like QuickBooks and Enverus, streamlining your workflow.
By aligning with FundThrough, small and medium businesses not only resolve their immediate financial needs easily, but also position themselves strategically for growth and opportunity, all while retaining control and flexibility over their financing choices.
Ready to get funded by a dedicated partner?
FAQs
Am I Qualified to Sell My A/R?
We are happy to help you find out. Check your eligibility and learn more by starting here.
Can I sell someone my accounts receivable?
Yes, you can sell your accounts receivable to a factoring company. You get quick access to cash by getting invoices paid ahead of net terms. The factoring company handles collecting payments from your customers, keeping a small fee of invoices paid early.
What are the advantages of selling accounts receivable?
Opting for FundThrough to sell your accounts receivable quickly unlocks essential working capital, making it easier to handle payroll, buy new equipment, and meet ongoing expenses without the burden of debt. This method not only smooths out your business operations but also circumvents the delays caused by late payments and the rigorous criteria often associated with conventional bank financing, all while maintaining clear and straightforward fee structures for full financial clarity.
What are the risks or disadvantages of selling A/R?
When selling accounts receivable, be mindful of the associated fees, which can vary based on factors like customer creditworthiness and invoice size. Additionally, be sure to work with a factoring firm who will treat your customers in a professional way.
What is the journal entry for selling accounts receivable?
The journal entry for selling accounts receivable depends on whether the company is using factoring or a similar financing arrangement. See our post on accounting for factoring receivables to learn how to record factoring transactions.
How Does Selling Receivables Work?
Selling receivables involves a business transferring its unpaid invoices to a factoring company in exchange for immediate cash. The factoring company advances a percentage of the invoice total, then collects the full payment from the business’s customer. Once collected, the factoring company returns the remaining balance, minus a fee.
Can accounts receivable be transferred?
Yes, accounts receivable can be transferred to a factoring company or occasionally a bank. This process involves selling unpaid invoices in exchange for immediate capital. The new owner of the receivables collects payments from the customers, keeping a percentage of invoices paid ahead of net terms.