How to Finance Consumer Receivables
Accounts receivable are the unpaid balances that result from goods and services on account. Companies typically sell items on account to allow customers to make payments over time. While this can help companies improve their sales figures, it can create difficult cash flow because the company must wait to collect the cash. To offset this delay period, companies may finance their receivables. Financing receivables is another term for factoring, which is the process of selling open accounts receivable balances to a collection agency at a discount.
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Instructions
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Separate accounts receivable balances by age. Companies will typically age receipts by 30, 60, 90 or 120 days. Factoring companies may be specific about the age of receivables during the purchasing process.
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Contact several factoring companies. Factoring companies will typically offer different discounts for receivables based on the company's information. For example, receivables in the 30-day age bracket may have a 10 percent discount, while 90-day receivables have a 20 percent discount.
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Negotiate the factoring process with purchasing companies. The factoring payment process may differ among purchasers, with some paying the entire balance upfront or holding a portion of money back until the purchaser collects all receivables.
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Tips & Warnings
Factoring receivables helps companies avoid lengthy collection processes that can distract business owners and managers from daily operations. Selling the oldest receivables allowed is also a good strategy when factoring receivables.
Organizations purchasing accounts receivables may require companies to refund a portion of the money paid if receivables remain uncollected. Companies should be careful when factoring receivables to organizations with recourse policies.
