Is Selling Your Receivables a Good Idea?
Under regular circumstances, your accounts receivable count as assets. They provide a source of receivable income for your business, and they can help you plan for your company’s future financial decisions.
However, we’re not living in normal circumstances right now, which means that you may be seeing some delays. These days, it can take longer for your receivables to turn into usable cash.
If those delays have put you in a tight financial spot, then you might consider factoring, or selling your receivables to a third party at a discount. You won’t receive the full amount from your receivables, but you will receive them faster.
Is the trade-off worth it? That depends on a few things.
When Should You Sell Your Receivables?
In some circumstances, selling receivables is a great option to help get cash flow moving again. For example, if your current cash flow doesn’t quite make up for the delay in your receivables, then selling those receivables can give you the immediate cash you need. Selling receivables is a good choice if you need a “fill in the gap” kind of option instead of something more long-term.
Is There a Better Option?
The problem with factoring is the amount of money that you lose in the long run. Factors, or the companies that buy accounts receivable, are often the same private companies that offer cash advances and loans at high markups.
Remember that factoring involves selling your receivables at a discount, which means that you won’t receive the full amount of money for your goods and services. As a result, some business owners would rather just pursue a short-term loan instead.
“But what about interest?” you might be wondering. “Doesn’t it all even out when you include the interest I’d have to pay on that loan?”
Not necessarily, but it does depend on the loan source. If you opt for a term loan, skip the lending companies and megabanks, and look for community banks and credit unions instead. Community banks and credit unions offer much better interest rates than other sources, which can help you save money while stimulating your cash flow.
You may even look for credit unions that cater specifically to your type of business. This way, you might find a group that understands your industry’s needs and can offer you financial services that match those needs.
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