receivables sale
receivables sale
Understanding Receivables Sale
When a business sells goods or services, it often offers payment terms to its customers, resulting in the creation of receivables. A receivables sale, in the context of financial factoring, refers to a transaction where a business sells these outstanding invoices to a third party, known as a factor, for immediate cash.
The Basics of Financial Factoring
Financial factoring is a financing method where a business sells its receivables at a discount to a factor. The factor gives the business an advance of typically 70% to 90% of the invoice value. Then, once the factor collects payment from the customers, it releases the remaining balance to the business, minus service fees.
Advantages of a Receivables Sale
Selling receivables allows companies to free up cash that would otherwise be tied up in outstanding invoices. This improves cash flow and enables businesses to invest in growth, manage expenses, and even take advantage of early payment discounts from suppliers.
Key Terms in Receivables Sale
In a receivables sale, key terms include:
- Advance rate: The percentage of the invoice that the factor pays upfront to the business.
- Discount rate: The fee that the factor charges for the service, often determined by the creditworthiness of the business’s customers and the time it takes for them to pay.
- Reserve: The portion of the invoice not initially advanced to the business, which is paid later minus the discount rate.
Is a Receivables Sale Right for Your Business?
Deciding to engage in a receivables sale can depend on various factors. If your business often waits on late payments or needs quicker access to working capital, selling receivables could be a smart option. It’s also important to consider whether the cost of factoring is less than the potential benefits of having immediate cash available.
Conclusion
In summary, a receivables sale can be a valuable tool for businesses looking to improve cash flow and reduce the wait for customer payments. By understanding the essentials of financial factoring, businesses can make informed decisions about whether this financing approach suits their needs.
