How to Sell Receivables With Recourse
A company experiencing a shortage of cash on hand may sell its accounts receivable to a factor to free up cash. A factor is a commercial lender that buys the accounts receivable from a company at a discount and proceeds to collect the money owed from the selling company's clients. A company may sell its receivable with or without recourse. When a company sells it receivables with recourse, it is still responsible if its customer fails to pay the factor on its invoice. Selling receivables without recourse leaves the company with no obligation should a customer fail to pay the factor.
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Instructions
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Identify which customer invoices you wish to sell. It is helpful to classify your accounts receivables based on the payment history of your clients. This is done by creating buckets based on number of days the invoices remain outstanding. For example, separate invoices that are less than 30 days past due, 31 to 60 days past due and over 60 days past due. A factor places a higher valuation on your receivables if it believes your receivables are of high quality. In other words, if your pool of receivables contain customers that pay their invoices within 30 days, it is a good indication of high-quality receivables.
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Research then contact several factors for price comparisons. There are many commercial lenders offering various payment terms based on selling receivables with and without recourse. Inform the lender that you wish to sell the receivables with recourse. The factor should apply a lower discount since you are ultimately responsible if the customer fails to pay the factor.
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Negotiate the terms of the transaction. A factor charges a percentage of the face value of the accounts receivable, a reserve fee and interest. Because you are selling your receivables with recourse, you should receive more favorable terms than if you sold the receivables without recourse.
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Tips & Warnings
One advantage of using a factor is the fast turnaround. Traditional bank financing usually takes longer and the credit terms are more stringent. Once you set up an account with a factor, you may sell your receivables as often as you wish, allowing you to receive the cash for your business quickly. After receiving approval, the cash is available to you within days.
The imputed interest rate of using a factor after taking into consideration the fees and interest is considerably higher than bank financing. There is also the issue of losing control over your client relationships because the factor takes over receiving the payments.
