Sale of Business Accounts Receivable
The sale of business accounts receivable is the process of selling the amount owed to you by your customers to a third-party company.3 min read
Updated November 24, 2020:
The sale of business accounts receivable is the process of selling the amount owed to you by your customers to a third-party company. You need to understand the ins and outs of the process to make it profitable for your company. When done legally, it protects you from the nightmare of collecting late payments from your debtors.
Why Sell Your Business Accounts Receivable?
- Immediate source of cash. Selling your accounts receivable to a factoring company can immediately cover your business costs. You can pay your employees' salaries, fund a project, or spend on a marketing campaign that will generate more income for your company. In this way, you are able to avoid getting loans with ridiculous interests.
- Save time and minimize the need for manpower. Collecting accounts receivable can be time-consuming and may require an in-house employee to collect the payment. When you sell your accounts receivables to a third-party company, you will be relieved from this burden. Your business operations are not hindered just because a customer was late on his invoice.
- Eliminate financial risks. Third-party companies will assume the risks involved with the accounts receivables. This means that it's not your problem anymore whether the customer pays the bills on time or never pays at all. Your hands are free to be more productive, and you can focus on more pressing issues within your company.
- Better credit rating. Because you don't have to wait for your accounts receivables to get paid, your cash flow is not stagnant and you are able to pay your creditors and vendors on time. Your business is not merely surviving but thriving because of the consistent flow of cash.
What Are Your Responsibilities in the Sale of Business Accounts Receivables?
- Be transparent. The buyer will have to know the creditworthiness and track record of your customers. Nobody wants to buy risky receivables. You will have to disclose information such as names, how much they owe you, and when the bill is due. If your debtors are big companies, you will be better able to sell your receivables than you would if your debtors were small business owners.
- Guarantees. It's unlikely that you can guarantee 100 percent of your receivables. If this involves large amounts, discuss with the buyer your company's billing policy so they know when to collect the payments. Explain the terms in your invoices, such as whether the due date is in 30 days or 90 days. The factoring company needs to understand your billing cycle and the extensions that you are giving your customers if there are any.
- Guidance. Before closing the sale, you have to make it clear whether you will help in the transition process or if you will be completely out of the scene. This also means alerting your customers about the new ownership of the accounts receivables. Some customers may get confused with the new system and may use this as an excuse for letting the due date slide.
How Can I Make the Sale of Business Accounts Receivables Secure?
- Verbal agreements must be avoided. All of the things that you and the factoring company have agreed on must be put into writing. You want to eliminate anything that might cause confusion to either party. List the obligations and rights of each party. For example, who should follow up on the invoices? Can the third party update the address for the delivery mail?
- Understand what you are signing up for in the contract. The last thing you want to happen after the sale of business accounts receivable is to have a damaged reputation. The factoring company, although they are now the legitimate owners of the receivables, should treat your customers with respect and dignity. Customers should be given proper consideration, and they shouldn't be threatened to pay the invoices.
- Choose third parties carefully. Work only with factoring companies that are known for their ethical and professional practices. You have to be comfortable with how they are going to collect the payments. Negotiate upfront and keep not only the rights of your company but also your customers' rights in mind.
If you need help with the sale of business accounts receivables, 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.