February 1, 2012 Bookkeeping en_US https://quickbooks.intuit.com/cas/dam/IMAGE/A8OH0LvUB/16dbb56f9917c24112b6b25c379bbe3a.jpg https://quickbooks.intuit.com/r/bookkeeping/when-to-consider-factoring-your-accounts-receivable/ When to consider selling your accounts receivable to a third party

When to consider selling your accounts receivable to a third party

By Kathryn Hawkins February 1, 2012

Your billable hours look great. The problem is, your clients are taking their time in paying your invoices. Meanwhile, your business is suffering from a lack of operating funds. Sound familiar? If so, you may want to consider selling your accounts receivable to a factoring agency.

Factoring agencies buy your unpaid invoices for a discounted rate, giving you an immediate cash flow. However, in most cases, you’ll need to repay the debt if the factor is unable to collect the payment due. Here’s when you should consider using this kind of service:

You need the money soon.

If you need the unpaid funds to make payroll or cover manufacturing costs, you may not be able to wait for clients to pay up. If unpaid invoices threaten to put you out of business, a factoring agency could be a worthwhile remedy. Be sure you’re willing to sacrifice some earnings: Factors charge a percentage of the total due based on the time it takes them to collect — up to 9 percent in one case.

Your clients represent big brands.

Factoring agencies don’t like risk, so they’ll generally only take invoices for well-known, well-established companies that have plenty of cash but are simply slow to pay their bills. If you’re trying to collect from the mechanic down the road, a collections agency or small-claims lawsuit may be a better option. Likewise, don’t bother trying to factor a $500 invoice: The typical agency only takes accounts worth $10,000 or more per month.

You don’t want to hurt your client relationships.

If, late payments aside, you have a positive relationship with your clients, you might not want to alienate them by threatening legal action or collections. Inform your client in neutral, business-like terms that a commercial invoice that isn’t paid within a certain number of days will be sold to a factoring agency as a matter of course, and you may be able to avoid damaging the business relationship. (First, consider charging interest for late payments as added incentive to help you collect.)

You’re fairly certain clients will pay up eventually.

In most cases, you’ll be responsible for paying back the entire debt to the factoring company if the companies that owe you money don’t respond within a pre-set period of time. Remember, factoring is not the same as hiring a debt collection agency. Think of the cash advance as a line of credit, rather than an actual payment: If the factor is unsuccessful in getting your invoices paid, you’re likely to be on the hook for the full amount. Be careful with your spending until you’ve received acknowledgment that collections have been made.

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Kathryn Hawkins is a writer with a passion for solving small business problems. Read more