An online article published by the Houston Chronicle analyzes the many advantages businesses gain by selling their accounts receivable to a third party that will collect the payments for a fee in a process called factoring. The article narrows down the advantages into four separate factors that make it easy for a business to decide if factoring receivables is the best option.
Cash Flow
The main advantage of selling accounts receivable is the instant influx of cash. Factoring is similar to a blood transfusion. The article likens accounts receivable to the lifeblood of a business, and selling accounts receivable can infuse the business with the cash flow necessary to pay bills, complete projects, expand and take on new business it may be turning away due to slow cash flow. Therefore, a company that sells its accounts receivable is able to increase cash flow thereby increasing sales revenue.
Personnel Reduction
The second benefit of factoring receivables is it eliminates the need for an in-house collection department. The collecting process is time-consuming and selling accounts receivable can save your business money by eliminating the need to hire and pay employees to waste time collecting late payments. Once a receivable is sold it becomes the burden of the factoring company to collect the debt owed by your customers, a burden you no longer have to worry about.
Default Risk
By purchasing your accounts receivable, some factoring companies also inherit the risk of default that accompanies the sale. You receive payment up front for the receivable, but if the debt is never paid off, the factoring company loses the money advanced to you.
Credit Rating
The last benefit discussed is the opportunity to develop a better credit rating for your business. One of the benefits of more stable cash flow is the availability of funds to pay your vendors and other creditors on time. Better, cash flow can also put a positive spin on your balance sheet.
Thinking about selling your accounts receivable? Give us a call and we’d be happy to work with you.
