Your business depends on consistent cash flow to keep operations running smoothly and customers satisfied. Extending your customers a line of credit using accounts receivable can help with cash flow, but it requires diligent follow-up and dedicated attention to be effective.
Selling your accounts receivable is a common financing option to keep your cash flow constant. Selling receivables to a factoring company will bring expertise and dedication to help your company take advantage of new business opportunities and growth.
Understanding Accounts Receivable
Accounts receivable is what your customers owe you after you deliver your services or goods. They indicate that you have made a sale on credit but have not yet collected payment for it. Accounts receivable are a part of your working capital, acting as assets since they are expected to bring revenue in the near future. Analyzing your accounts receivable will help you understand your financial stability and liquidity.
Examples of Accounts Receivable
Accounts receivable are a common aspect of many businesses. A few industries that often use accounts receivable include:
- Staffing: A staffing agency sometimes has to wait months to see a payment from clients, but must continue to have enough cash to cover payroll.
- Distribution: Many distributors and wholesalers wait weeks to months to receive payment for their services but the demand for more inventory is constant.
- Manufacturing: A company may manufacture a product, such as furniture, automobiles, or clothing, and sell it to a retailer that will pay them for the goods after they have received them.
- Service Companies: Service providers work with numerous customers and each may have a unique payment schedule, keeping the service provider waiting 30-90 days for payment.
- Health and Wellness: Companies may begin to mass produce products for big-box retailers and then have to wait for months to get paid but still need supplies to keep up operations.
Selling Your Accounts Receivable?
Make the most out of your business’s accounts receivables by leveraging Porter Capital’s factoring services.
Sell Your Accounts Receivable
Challenges of Managing Accounts Receivable
While accounts receivable may be a vital component of your business, they also pose a level of risk. With outstanding invoices, your company may face challenges such as:
- Running out of necessary funds to maintain business functions
- Rising costs of transactions
- Decreasing customer satisfaction
- Needing to write off outstanding receivables as bad debt
- Finding more errors on bills and invoices
- Slowing operations and production
- Missing revenue targets
- Falling behind competitors
- Worrying about making payroll
Overcome Challenges by Selling Your Accounts Receivable
The sale of your accounts receivable allows your business to maintain dependable cash flow and avoid the problems of managing receivables. Two ways to sell your receivables include:
- Factoring: This method involves selling your open invoices to a factoring company that gives you a cash advance while they collect your accounts receivable. You can sell some or all of your invoices, with or without recourse. Selling with recourse is when your business buys back the invoices your factoring company is unable to collect payment from, while non-recourse is when the factoring company assumes the risk of no payment themselves.
- Accounts receivable financing: This option is similar to a bank loan, but it is backed by a pledge of business assets connected with accounts receivable rather than collateral like real estate or equipment. Companies must submit all accounts receivable as collateral to the financing company. Accounts receivable financing is ideal when you plan to transition to a traditional bank line of credit in the near future.
The Benefits of Selling Accounts Receivable
Selling your accounts receivable opens many options for your business. It can provide a quick and effective solution to your cash flow problems, enabling you to enjoy a steady revenue stream that helps you pay essential bills and invest in growth.
1. Improved Cash Flow
Selling your accounts receivable helps improve your cash flow by getting you the money you need for your business right when you need it. Instead of waiting for your customers to pay you before continuing or growing operations, you have control over your timeline and growth. Factoring companies help release the cash tied up in your accounts receivable so you can continue production and expansion efforts.
Selling receivables gives you the funds to perform essential tasks such as:
- Hiring and retaining staff
- Buying and maintaining equipment
- Purchasing inventory
- Paying for subscriptions, rent, utilities and other important bills
- Accepting projects to grow your business
2. Reduced Risk
You can enjoy reduced risk and greater confidence when you sell recurring invoices with reliable paying customers. You know your customers will pay, giving you and your factoring company confidence to move forward.
Factoring receivables gives you access to working capital without adding debt. This financing option differs from loans and equity that require collateral or changes in ownership. Instead of harming your balance sheet, selling receivables benefits your business and gives you access to necessary funds. You can get cash in a shorter time frame while avoiding risk and personal liability.
3. Increased Flexibility
Factoring companies take on the work of managing and collecting your receivables, saving you time and money. Their work gives you the flexibility to focus on growing your business and providing quality customer service. Instead of hiring someone in-house to work on your accounts receivable, you can let a professional factoring company handle the details and bring you all the benefits.
When you factor your invoices, you decide how often and how much you want to factor. You can grow and adjust your business on your own time by selling what you need when necessary. Selling accounts receivable provides quicker access to funds than traditional financing options, enabling you to pay for essential expenses or invest in opportunities.
4. Greater Customer Satisfaction
Allowing a factoring company to manage your accounts receivable brings a level of organization that benefits your customers just as much as it benefits your enterprise. Factoring companies can streamline payment processes and promote clear communication so you and your customers understand what to expect. They ensure your customers get the products and services they need while you receive the money you deserve.
Some customers need time to collect the funds to pay you. Using a factoring company can help preserve your relationships with these customers by giving them enough time to pay and providing you with enough cash to maintain business operations.
Consistent cash flow enables your business to deliver more value to customers. You can hire top talent to better serve them or invest in high-quality equipment that helps you bring quicker solutions to satisfy your customers’ needs. As your company grows and develops into a powerful enterprise, your clients will enjoy benefits that will increase their loyalty and satisfaction.