Is Selling Accounts Receivable Right for Your Business?
There’s more to a business than just maintaining stable cash flow. Collecting enough cash to grow your business often requires more than on-time payments. When an opportunity to really scale appears, whether that’s a new location, an additional product, or a big project, a small business owner needs access to immediate cash. Selling accounts receivables is just one tool in a business owner’s kit.
But even for businesses without cash flow gaps, tapping into credit isn’t easy.
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. In 2021, one in ten Canadians planned to take out a business loan, but getting approved is hardly guaranteed. In the U.S., we know that 27% of businesses are unable to obtain traditional funding.
The fact is, if you haven’t been in business for at least two or three years, it’s likely that your business won’t be approved for a traditional business loan. Even if you have a solid track record, the process can take weeks or even months. The opportunity you needed the cash for has likely passed by that time.
But what if you already have a line of credit but simply need to raise your limit? Unfortunately, that is another headache mired in bureaucracy. Even a modest credit increase would take weeks to approve with stringent requirements and a pile of paperwork.
Other financing options require collateral or long-term commitment. These methods for immediate cash can be risky, with convoluted contracts and hidden fees.
Small businesses need a way to access cash almost instantly 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?
- The factoring company buys the invoice.
- You receive a portion of the invoice, usually 70-90%, ahead of the net terms. At FundThrough, you get up to 100% of the invoice amount in days.
- The client pays the invoice amount to the factoring company according to the original net terms.
A small business doesn’t have to worry about its creditworthiness as much as prove its customers’ creditworthiness. In many cases, those customers are well-established businesses with great credit.
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.
The Problem With Extended Payment Terms
Small businesses that sell their products and services to commercial clients often have to offer extended payment terms. Most enterprise clients demand such payment terms as a condition of doing business.
Commercial companies usually take 30 to 60 days, but this period is longer for certain industries. Oil and gas companies, for example, can take up to 90 days (or longer) for payment.
For small or medium-sized businesses, waiting months to get paid for services rendered or products delivered significantly impacts their cash flow. While waiting for these payments, a business may need to:
- Cover payroll
- Hire staff
- Buy or maintain equipment
- Purchase inventory
- Pay subscriptions, utilities, and other critical bills
- 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.
In addition to solving this issue by paying your invoices early, the invoice factoring company also takes on the admin work of handling and collecting your receivables, thus saving you time and money.
Because getting paid by your client is fairly certain, it’s a low risk, low commitment way to get funded – once your client pays their invoice, there are no strings attached.
But how do you know if that would be a smart financing decision for your business?
4 Reasons Why Selling Accounts Receivable Is a Good Idea
Here are key reasons why selling accounts receivables might be a right fit for your business:
1. Fast financing for rapid growth
The right invoice factoring solution should provide an easy way to apply for and receive cash. You can get cash fast, usually within days, instead of waiting weeks or months for working capital.
2. Flexibility 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.
3. Low risk for everyone
You know your customer will pay, so you know the money will come through to pay off the advance. For this reason, there is a low risk for both you and the receivable factoring company. Once your customer pays invoices to the factoring company, there are no more obligations.
4. Easy to apply for, track, and manage invoice factoring
With FundThrough, it takes less than 5 minutes to apply, and our AI technology generates automated funding offers in minutes. Furthermore, our integration with QuickBooks reduces the manual work of uploading invoices. Plus, you can track and manage your funded invoices with complete transparency on our platform.
How to Sell Your Account Receivables?
The best way to see how you can start selling accounts receivables is to take a quick assessment to see if you qualify with FundThrough.
Once you qualify for invoice factoring, you can choose which invoices to finance. After the approval is complete, the funding is deposited directly into your bank account, often within days.
Ask anyone in business and they’ll tell you that it takes money to make money. But if you’re a new business owner, you might be