A future receivables sale agreement is a financing option that allows a business to sell its future accounts receivables to a financing company at a discount in exchange for immediate cash. This type of financing is popular among small businesses and start-ups that need access to working capital but may not have the credit or collateral needed for traditional loans.
In a future receivables sale agreement, the financing company will purchase the business’s future accounts receivables at a discount, usually between 5% and 20%. This means that the business will receive immediate cash but will not collect the full amount of its accounts receivables when they come due. The financing company will collect the full amount of the accounts receivables from the business’s customers when they come due and will receive the difference between the discounted price and the full amount collected as its profit.
Future receivables sale agreements are structured as a sale rather than a loan, which can be beneficial for businesses that need to maintain their creditworthiness or do not have collateral to pledge. Additionally, future receivables sale agreements are often faster and easier to obtain than traditional loans, with less paperwork and fewer requirements.
There are some drawbacks to future receivables sale agreements, however. Because the financing company is assuming the risk of the business’s receivables, it may charge higher fees or interest rates than traditional financing options. Additionally, the business may not have control over its customer relationships or collections process, which could damage its reputation or relationships with customers.
Overall, future receivables sale agreements can be a useful tool for businesses that need immediate cash and have a reliable stream of accounts receivables. However, businesses should carefully consider the costs and benefits of this type of financing and consult with a finance professional before entering into an agreement.