Thinking Of Selling Accounts Receivables To a Factor? Read This First | Behalf
Selling Accounts Receivables To A Factor: Is It Bad for Business?
Whether you are a decision maker at a large corporation or a cog in its departmental wheels, you know how important it is that customers pay for your products and services. Companies go to great lengths to ensure that they get paid: selling accounts receivables, credit card processing, etc. No matter how loyal your company’s customer base, its accounts receivable department inevitably encounters the occasional slow or non-paying customer. No doubt your company has a protocol for dealing with unruly customers.
Many competitive corporations extend a trade credit to their customers, giving them extra time to fulfill payment. The credit can take the form of Net 15, Net 30, etc. A trade credit is an internal way to extend financing to customers, but it can also hurt your business cash flow. Trade credits create a gap between the time customers receive goods or services and actually pay for them. The delay ties up your cash flow, which can create new problems for your company when the amount of outstanding customer payments snowballs out of control. Your company can remedy the delay by selling receivables but there are other options. Selling accounts receivables is a common practice but is it bad for business? The answer is yes. This article explains why it is bad for business and an alternative your company can implement to protect itself from slow or non-paying customers.
Why You Shouldn’t Sell Accounts Receivables to a Factor
Also known as factoring, selling accounts receivables is a way for you to close the gap that trade credits create. A factoring company buys your company’s outstanding receivables and advances 60-80% of it back to your company. The remaining amount is paid to you once the customer fulfills payment. There are pros and cons to selling accounts receivables in this manner. Factoring companies can charge exorbitant fees, undermining your sales. Simply put, you never receive the full amount you invoiced the customer. Selling accounts receivables is a short term remedy. It allows your company to feel the partial benefit of its sales fast, but not the full benefits.
Nevertheless, selling accounts receivables has another advantage. Factoring companies collect directly from your customers. That may come as a relief to your accounts receivable department, who would now have one less thing to worry about. Still, there are other business financing methods that offer the same service at a much more affordable price.
The Better Alternative: Flexible Customer Credit
Trade credits are an example of internal customer financing, but 3rd party customer financing is a better alternative. In modern business, your customers expect you to give them multiple, flexible payment options, but do not expect you to manage the programs yourself. Look for 3rd party financing options that can integrate with your sales process and replace your burdensome trade credit programs.
Instead of selling receivables to a factor, consider offering your customers a business line of credit so they can always pay you on time. Behalf’s business line of credit can increase your customer’s purchasing power up to $50,000. There are no hidden fees and affordable rates for both your company and its customers. Your business customers can make larger, more frequent purchases when they use the line of credit to pay you, the vendor. You get paid within 1 day and your customer can customize their payment schedule and extend payment to Behalf up to six months. The funds on their line of credit replenish as they pay, giving them constant access to working capital.
Learn more about how Behalf is transforming the way business buy and sell here.