Accounts receivable purchasing is a transaction in which a business sells its accounts receivable, or invoices, to a third party commercial financial company. This is done so that the business can receive cash more quickly than it would by waiting 30 to 60 days for a customer payment. Accounts receivable purchasing is sometimes called “accounts receivable financing.”
The terms and nature of account receivable purchasing and financing can differ among various industries and financial services providers. Most often we can purchase your invoices and advance you money within 24 hours. The advance rate can range from 80% to as much as 95% depending on the industry your business is operating in, your customers’ credit histories and other criteria. Once we collect from your customers, we pay you the reserve balances of the invoices, minus a fee for assuming the collection risk. From a seller’s perspective, the benefit of accounts receivable purchasing is that, instead of waiting one to two months, or longer for a customer payment, you now have that cash in hand to operate and grow your business.
Accounts receivables purchasing is not a loan. No debt is assumed by the sale of your receivables. The funds are unrestricted, providing you with more flexibility than with a traditional bank loan.
There are several reasons why an account receivable purchase is a valuable financial tool for many businesses. The key benefit is that it provides a quick boost to your cash flow. We can usually provide cash on your accounts receivable within 24 hours. This can solve short-term cash flow issues and help fuel the growth of your business.
No, it actually goes back several centuries. The origin of account receivable purchasing lies in overseas trade among nations. It became a part of doing business in England as early as the 1400s, and came to America with the Pilgrims in 1620. Like all financial tools, methods of receivables financing has evolved over the years. It grew in the United States as an effective way for companies to build more cash flow, due to limitations companies faced securing loans in the nation’s fragmented banking system.
Here’s a fictional example to illustrate a common situation faced by many business owners:
ABC Transport is a trucking company that delivers concrete to a prime contractor, Big Corp., that has a government construction contract valued at $800,000,000.00. ABC has submitted its invoice and is now waiting to be paid for the concrete delivered, which usually takes 60 or more days given the size of the construction project. Meanwhile, ABC Transport wants to serve more clients in the West where the construction project is located. While waiting to be paid by Big Corp., ABC Transport has just landed a new customer who needs concrete shipped from Kansas City to Los Angeles. However, ABC does not have the cash flow to cover the immediate fuel, payroll and maintenance costs of running the route. The owners of ABC Transport have been in this situation before. They feel that the lack of available cash flow has prevented the company from taking on new business.
ABC Transport turns to Sapient Capital Resources, selling its Big Corp. invoice in exchange for a 80 percent advance on the total amount within a day. The influx of cash replenishes ABC’s reserves, allowing it to run the Kansas City-Los Angeles route.