Key Takeaways

  • A receivables purchase agreement is a financial contract where a company sells its outstanding invoices to a buyer for immediate cash.
  • These agreements can provide liquidity, offload collection risks, and are distinct from traditional loans.
  • Key terms often include purchase price, recourse provisions, representations, warranties, and servicing arrangements.
  • They are used in various industries and can support short-term cash flow without increasing debt on the balance sheet.
  • Legal review is crucial to ensure compliance, especially around UCC Article 9 and assignment clauses in customer contracts.

An accounts receivable purchase agreement is a contract between a buyer and seller. The seller sells receivables to get cash up front, and the buyer has the right to collect the receivables from the original customer.

About Receivables Purchase Agreements

Receivables purchase agreements give a company the chance to sell off as-yet-unpaid bills, or "receivables." Buyers gain a profit-making opportunity, while sellers gain security. These types of agreements create a contractual framework for the sales of accounts receivable. A company might sell all receivables through a single agreement, or it may decide to sell an interest in its entire pool of receivables.

These agreements are often between multiple parties: one company sells its receivables, another party buys them, and additional companies serve as administrators and servicers.

During the course of business, an operating company creates accounts receivables. When it sells them to a financing company, the accounts receivable purchase agreement legalizes the process.

Common Terms in a Receivables Purchase Agreement

When drafting or reviewing a receivables purchase agreement, parties should pay close attention to several common contractual elements:

  • Purchase Price: Typically a discounted value of the receivables. This may vary depending on the age or quality of the invoices.
  • Recourse vs. Non-Recourse: Defines whether the seller remains liable if the receivables are uncollectible.
  • Representations and Warranties: Sellers usually warrant that receivables are valid, enforceable, and free of liens.
  • Servicing Terms: Indicates whether the seller or a third party will manage collections.
  • Termination Rights: Specifies the conditions under which either party can terminate the agreement.
  • Governing Law and Dispute Resolution: Determines the legal jurisdiction and process for resolving disputes.

These terms collectively shape the risks and responsibilities each party undertakes during the sale of receivables​.

What Is Accounts Receivable Financing?

Accounts receivable financing is a financing arrangement where a company uses its receivables, or outstanding invoices, as collateral. Typically, accounts receivables financing companies, also known as factoring companies, advance a company 70 to 90 percent of the outstanding invoice value. The factoring company then collects the debts. It subtracts a factoring fee from the remainder of the collected amount it makes to the original company.

The amount a company receives is largely based on the age of the receivables. Under this agreement, the factoring company pays the original company an amount that's equivalent to a reduced value of unpaid invoices or receivables.

Receivables come about when a company sells something but isn't paid immediately — otherwise known as a "bill me later" transaction. The company sends the customer an invoice for payment. They may offer a discount for quick payment.

Companies usually book sales revenue when they make a sale, even before they receive payment. Until payment comes in, sales revenue appears as accounts receivable on the company ledger. When customers pay their invoices, the amount moves from accounts receivable to cash. Before payment comes in, the company has to wait and hope the customer doesn't default.

Instead of waiting to collect outstanding money, a company may choose to sell its receivables to another entity, often at a discount. The company then gets cash up front and no longer has to deal with the uncertainty of waiting or the hassle of collecting.

A company can have a major asset in receivables. The more quickly they're converted to cash, the faster the company can use the money for other things.

Some companies specialize in collecting outstanding monies. If they purchase receivables at 80 cents on the dollar and collect the full amount of the receivables, they make a tidy profit.

Receivables Purchase vs. Traditional Business Loans

Though often confused with loans, a receivables purchase agreement is not technically a loan:

  • No Debt Accrual: Unlike loans, these agreements do not create liabilities on the balance sheet.
  • No Repayment Obligation: The seller is not required to repay funds unless recourse provisions apply.
  • Faster Access to Capital: These arrangements are typically quicker to set up than traditional financing.
  • Creditworthiness of Customers, Not Seller: The buyer evaluates the debtor's reliability, not just the seller's credit profile.

This makes receivables purchases particularly attractive for companies with large volumes of outstanding invoices and seasonal cash flow fluctuations​.

Important Factors to Consider

Both sides should consider the pros and cons to these agreements. When figuring out whether to include receivables in an asset purchase agreement and the best ways to structure the agreement, consider the following factors:

  • Payment history: What's the seller's history in collecting receivables? How long does it typically take the seller to collect? If the seller takes a long time to collect, or if it writes off a large number of collections, the buyer will be more inclined to demand a bigger discount.
  • Collection percentage: How do you set a discount for outstanding receivables? Most agreements allocate varying percentages for receivables based on their age. For instance, receivables that are less than 30 days old may pay out at 90 percent, and those from 30 to 60 days old may pay out at 75 percent.
  • Tax implications: Are there potential tax savings if an asset purchase agreement excludes receivables? If so, a seller may have an incentive to exclude them.
  • Trust between the parties: Do the buyer and seller have open and honest communication? Do they practice full disclosure in negotiations? If so, there's a lower risk of litigation in the future.

Whether you're the buyer or seller in this scenario, you may want to consult with a skilled and knowledgeable advisor. He or she can guide you through the best ways of structuring the transaction.

Who Uses Receivables Purchase Agreements?

This financing tool is used by a wide range of businesses across industries:

  • Startups and SMBs looking for working capital without increasing debt.
  • Manufacturers that offer net-30 or net-60 terms to buyers.
  • Service providers with large invoice volumes and long billing cycles.
  • Logistics and transportation firms that often have cash flow gaps.

Receivables purchase agreements are especially common in industries where delayed payments are standard but operational cash needs are immediate​.

Legal and Regulatory Considerations

Businesses entering into a receivables purchase agreement should consult legal counsel to address key compliance areas:

  • UCC Article 9: In the U.S., the sale of receivables is treated as a secured transaction and must be perfected through proper UCC filings.
  • Customer Contract Clauses: Check whether existing customer agreements restrict the assignment of receivables.
  • Tax Treatment: Depending on the structure, the transaction may be treated as a sale or a loan for tax purposes.
  • Bankruptcy Implications: If the seller later files for bankruptcy, improperly structured agreements may be recharacterized as loans.

Legal oversight ensures the transaction is enforceable and minimizes the risk of future disputes or regulatory challenges​.

Frequently Asked Questions

  1. What is the purpose of a receivables purchase agreement?
    It allows a business to sell its unpaid invoices to a buyer for immediate cash, improving liquidity without taking on traditional debt.
  2. Is a receivables purchase agreement a loan?
    No. It’s a sale of an asset (accounts receivable), not a loan, though certain terms may resemble lending arrangements in some structures.
  3. What is the difference between recourse and non-recourse agreements?
    In a recourse agreement, the seller may be responsible if the receivables are uncollectible. In non-recourse, the buyer bears that risk.
  4. Are there legal risks with selling receivables?
    Yes. Improper structuring can lead to tax issues or recharacterization in bankruptcy. Legal counsel is recommended.
  5. Can any business use a receivables purchase agreement?
    Generally yes, but it is most beneficial to companies with regular invoicing cycles and creditworthy customers.

If you need help with an accounts receivable purchase agreement, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.