Have you ever heard another business owner say they were selling their receivables? Did it make you wonder why a company would sell its receivables to another company?
The answer is quite simple, to quickly and easily increase their working capital.
The process is called factoring or accounts receivable financing and is an excellent alternative to traditional bank financing. Factoring companies will work with companies of all sizes and in all stages of business, from start-ups to well-established companies.
How does selling your receivables work?
Once approved and the agreements have been signed, the factoring company will purchase and verify all outstanding invoices and pay you a percentage (up to 95%) of the invoice value. Going forward, you fill your orders as you usually would and submit copies of your invoices to the factoring company. As the factor purchases the invoices, funds are made available to you to draw down as you need them. When the customer pays the factoring company for your invoice, the balance of the invoice value less the factoring fees are paid to you.
Benefits of selling your receivables
Factoring offers numerous benefits for your business. The most significant benefit is that it eliminates the often 30-90+ days you could wait to be paid. Additionally, factoring companies can also offer some cost-saving services for little to no cost. The services can include credit checks on your customers to help you lower your risk of non-payment and other back-office services such as collections.