What is Accounts Receivable?
Accounts receivable (A/R) is an accounting ledger listing the money owed to a company. It tracks what customers owe.
Selling on credit occurs when a business provides goods or services under an agreement that the customer will pay later. The company selling on credit issues an invoice that lists the amount owed and the due date. Payment terms are usually 30, 60, 90, or 120 days.
The company records transaction and invoice information in its Accounts Receivable (A/R) ledger when the goods or services are delivered. When the customer pays, the company makes another journal entry to reflect the change.
Invoicing customers and managing accounts receivable (A/R) is a common practice, especially in business-to-business (B2B) transactions. Some businesses offer early payment discounts to encourage clients to settle their accounts promptly. A/R is reported on a company’s balance sheet.
What does it mean to Sell Accounts Receivable?
Selling accounts receivable typically refers to accounts receivable factoring, a financing solution in which a business sells its outstanding invoices to a third-party company, known as a factoring company, for immediate cash.
Instead of waiting 30, 60, or even 90 days for customers to pay, businesses receive an upfront advance, usually 80% to 95% of the invoice value. The factoring company then collects payment directly from the customer and remits the remaining balance, minus a small fee.
This process enables businesses to access short-term funds, enhancing their cash flow without incurring new debt or diluting their equity. The financing option can also help fuel growth opportunities and expansion efforts.
Why Do Companies Sell Receivables?
There are several reasons why small business owners sell accounts receivable, also known as accounts receivable financing. Companies experiencing rapid growth then use accounts receivable financing to collect money on outstanding invoices.
Quick Funding
Most factoring companies provide cash advances within 24 hours of selling accounts receivable (A/R) invoices. Quick access to working capital provides small businesses with more flexibility to operate, grow, and invest.
Stable Cash Flow
It’s challenging to accurately predict the flow of funds when customer payments arrive at varying times. When a business factors receivables, it knows exactly when and how much it gets paid, making it easier to budget and stay on top of expenses. Achieving a more predictable cash flow enables improved financial planning.
Solve Working Capital Needs
Selling accounts receivable (A/R) assets is a form of working capital financing. Companies that factor invoices are typically trying to address an immediate need, such as making payroll or paying rent.
The Factoring Company Handles Collections
When a company buys accounts receivable (A/R) assets, it collects the invoice payments. Some businesses benefit from outsourcing their back-office billing work. Companies that use whole ledger factoring don’t need a collections department.
How does Selling Receivables work?
The first step is to partner with a third-party company, commonly referred to as a factoring company or Factor. When you sell accounts receivable, the factoring firm buys them at a discounted rate. Small businesses receive a cash advance from the factor. The advance rate is a percentage of the discounted price.
For example, if a business factors $50,000 in receivables at the discount rate of 2%, the sale value is $49,000. If the advance rate is 95%, the business receives a cash advance of $46,550.
The company puts the remaining $2,450 into a reserve account until it collects payment from the business’s customers. Once the customers pay their invoices to the factor, it releases their reserve amount minus any fees for services rendered.
Here is a Breakdown of the Factoring Accounts Receivable Process
- Step 1: Sign a factoring agreement to start the factoring relationship.
- Step 2: Deliver the goods or services to your clients.
- Step 3: Send the invoice to the Factor for approval.
- Step 4: The factor sends a cash advance to your business bank account.
- Step 5: The factor waits to get paid when your client pays their invoice.
- Step 6: The factor sends you the reserve amount minus their fees once payment is received.
What is an A/R Factoring Company?
A factoring company, or factor, is a financing institution that purchases receivables at a discounted rate in exchange for providing a cash advance. The factor then becomes responsible for collecting the invoice amount.
Let’s examine some of the key differences between various factors.
Recourse vs. Non-Recourse
Recourse factoring means your company is liable if your customers default on their invoices. In non-recourse factoring, the factoring company assumes the risk for late payments or non-payment of invoices.
Notification Factoring
Some factors will notify your customers when they purchase the invoices, and others will not. If you don’t want your customers alerted when you sell their invoices, look for a company that doesn’t notify them. United Capital Source won’t inform your customers.
Additional Services
Some factors stand out because they offer enhanced services to help you process invoices. Some additional services to consider when looking for a factoring company include:
- Easy invoice uploads.
- Integration with your accounting software.
- Credit checks on your customers.
- A/R processing tools.
- Online portals or mobile apps for convenient processing
What are the qualifications for Selling Accounts Receivable?
One of the benefits of factoring is that it has lower qualifications than a traditional bank loan. Factors look at your client’s credit more than yours, since repayment comes from your customers.
Some companies don’t have any minimum requirements, but most approved businesses meet the following qualifications:
- Credit score: 550+.
- Annual revenue: $250k+.
- Time in business: At least 1 year.
How to apply for Accounts Receivable Factoring:
You can apply for invoice factoring through United Capital Source by following these steps.
Step 1: Make sure your customers are reliable.
Factoring invoices only works when your customers pay their invoices on time and in full. Ensure your customers will pay before contacting a factoring company.
Step 2: Gather your documentation.
When you apply, the factoring company needs to review the following documents:
- Driver’s license.
- Voided business check.
- Bank statements from the previous three months.
- Business tax return.
- Accounts receivable aging report, Accounts payable report, and debt schedule.
Step 3: Apply.
You can complete our one-page application or contact us by phone to apply. Either way, you’ll need to provide the information above and the invoice amount you want to sell.
Step 4: Speak to a representative.
Once you apply, one of our representatives will contact you to discuss the factoring fee, factoring rate, and terms associated with the sale. You’ll get a breakdown of all costs, so you don’t have to worry about hidden fees.
Step 5: Receive approval.
The entire process takes about two weeks to finalize. Funds will appear in your bank account 1-2 days after completing the application.
What are the Benefits of Selling A/R?
The primary benefits of selling outstanding receivables include rapid access to capital and improved cash flow stability. Many businesses turn to accounts receivable factoring when they need funds quickly to cover operational expenses, such as payroll, rent, or inventory purchases.
In addition to the funding benefit, the factoring company often serves as your accounts receivable (A/R) back office, managing collections, sending payment reminders, and handling customer communication related to invoices. This saves your internal team time and resources.
Unlike traditional loans, invoice factoring does not create debt. It’s not based on your credit score or collateral but rather on your customers’ ability to pay. That makes it significantly easier and faster to get approved, especially for startups or businesses with less-than-perfect credit.
What are the drawbacks of Selling A/R?
The primary disadvantage of selling accounts receivable is that it incurs fees that can impact profit margins. Fees are typically a percentage of the invoice total and vary based on how long it takes your customers to pay. The longer it takes to collect payment, the higher the total cost will be.
While factoring can provide a consistent cash flow, it’s essential to weigh these fees against the financial benefits it offers. In many cases, the value of fast funding and outsourced collections outweighs the costs, especially for businesses in growth mode or facing cash flow gaps.
Another potential downside is loss of direct control over the customer payment experience, depending on how the factoring company handles collections. However, many reputable factors offer non-notification or white-label services to maintain your customer relationships.
A/R Factoring Pros & Cons:
Pros:
- Provides immediate funds to support your business.
- Solves short-term cash flow issues.
- Easier approval than traditional loans.
- No debt added to your balance sheet.
- A factoring company handles collections and accounts receivable (A/R) tasks.
- Based on your customers’ credit, not yours.
Cons:
- Fees can reduce overall profit margins.
- Higher costs if customers pay slowly.
- May lose some control over customer communications.
- Not ideal for businesses with unreliable or slow-paying clients.
Frequently Asked Questions
Here are some of the most common questions about selling accounts receivable.
What Industries Typically Sell Accounts Receivable?
Selling accounts receivable is more common in industries where businesses regularly deal with slow-paying customers and offer net terms (like Net 30, 60, or 90). These industries often experience delays in collecting payments, which can strain working capital and disrupt operations.
Industries that typically use accounts receivable factoring include:
- Trucking and freight
- Manufacturing
- Wholesale and distribution
- Staffing and recruitment
- Construction and subcontracting
- Business services (e.g., IT, consulting, janitorial)
- Apparel and textiles
- Oil and gas services
- Government contractors
These businesses often rely on advanced funds from factoring companies to maintain healthy cash flow and support ongoing operations.
What Are the Costs of Selling Accounts Receivable?
The primary cost of selling your receivables is the factoring fee, which typically ranges from 1% to 5% of the invoice value per month. This fee depends on several factors, including the creditworthiness of your customers, the invoice amount, and how long it takes the customer to pay.
In addition to the base rate, factoring transactions may include other charges such as:
- Application or setup fees
- Due diligence or underwriting fees
- Wire transfer or ACH fees
- Monthly minimum volume fees
- Early termination fees (in long-term contracts)
It’s essential to carefully review the agreement and understand the whole pricing structure before committing to a factoring company.
How Do I Know if Selling Accounts Receivable Is Right for My Business?
Selling your accounts receivable may be a smart move if your business is experiencing cash flow problems due to slow-paying customers and needs to access funds quickly. If you frequently struggle to pay operating expenses on time, even though your sales are strong, it may be time to consider this financing solution.
Invoice factoring is beneficial if your business:
- Needs an advance payment on invoices to cover payroll, rent, or other overhead
- Wants to avoid taking on additional debt
- Has a customer base with strong credit and consistent payment behavior
- It is growing quickly and needs predictable, recurring capital
- Can’t qualify for traditional loans due to poor credit or limited time in business
- Needs a flexible funding option to support operations
Factoring can restore financial stability and support healthy cash flow, especially in industries where long payment cycles are the norm.
Can I Get Accounts Receivable Factoring with Bad Credit?
Yes, accounts receivable factoring is available even if you have bad credit. One of the most significant advantages of factoring is that approval is based primarily on the creditworthiness of your customers, rather than your own. That makes it an accessible funding option for business owners with limited or damaged credit histories.
Many financial institutions and alternative lenders offer factoring programs designed explicitly for credit-challenged businesses. If factoring isn’t the right fit, bad credit business loans may also help you secure the working capital you need. Be sure to compare rates, terms, and repayment structures to select the financing option that best supports your long-term success.
Selling Accounts Receivable – Final Thoughts
Receivables factoring is ideal for small businesses that require immediate working capital to cover their expenses. It’s more expensive than traditional financing, but it’s easier to qualify and allows you to access the assets in accounts receivable sooner than waiting for your customers to pay.
When selecting an invoice factoring company, review customer testimonials and look for transparency. You want to avoid any hidden fees or charges.
At UCS, we provide an upfront breakdown of all costs. Contact us to discuss your accounts receivable factoring options.
