By selling their receivables, companies can free up liquidity, minimize their risk and reduce their receivables management workload. Learn here how the sale of receivables works and what kinds of receivables there are.
When a company sells its receivables it transfers a combined package of invoices owed to it by its customers to a buyer, for example a debt collection company. Unlike fiduciary collection, ownership of the receivables sold is transferred to the buyer. The seller therefore no longer owns the claims or has the default risk. This means that the seller can remove these receivables from their balance sheet and plan with certainty using the liquidity acquired.
Selling receivables can benefit companies from a wide range of sectors, for example online retailers, energy utilities or banks that wish to get rid of distressed receivables or non-performing mortgages.
Depending on the time of the sale and the status of the receivable, a distinction is made between factoring and the traditional sale of receivables. If the receivable is not yet overdue the process is called factoring. In the case of the traditional selling of receivables, the outstanding receivable is already overdue. Debt collection companies specialize in buying and recovering these overdue or legally enforceable receivables. Generally, these bad debts are combined and sold as receivables packages/portfolios.
The process of selling receivables is simple. A few steps is all it takes to turn your outstanding receivables into liquid resources:
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Outstanding receivables occur wherever business is done and irrespective of sector. And almost wherever receivables occur they can also be sold. This applies equally to unpaid electricity or internet bills owed by consumers and to outstanding payments between two companies. And if you would like to sell secured receivables like mortgage-backed loans, that too is not a problem!
Secured receivables are underpinned by tangible assets, which is why they are regarded as more secure. Secured receivables are plots of land, properties or certain valuable objects (like cars). The values of these assets are subject only to minimal fluctuations and can generally be sold quickly. The proceeds from the sale allow the seller or creditor to quickly receive their payments.
Unsecured receivables, on the other hand, refer to goods or services that have been used by the defaulting payer, for example telephone bills, bills for consumer goods and durables. This means that an unsecured receivable has no collateral whatsoever that the seller or creditor could liquidate to obtain their payments.
In addition there are legally enforceable receivables which are officially certified e.g. by a notary public or a court. The official document certifies that the creditor is the owner of a specific item. In a legally enforceable receivable the type and scope of the debts are described precisely. It forms the legal basis for a judicial enforcement. These kinds of receivables can also be sold by a creditor.
By engaging a debt collection service provider, companies save a lot of time and money, especially in conjunction with the sale of receivables. As soon as the sale is completed the seller no longer has any reconciliation, checking or accounting work in association with the debts.
If larger volumes of overdue invoices are constantly accumulating in your company it is worth working closely with a debt collection partner. Within the scope of what is known as a forward flow deal, you can transfer your outstanding receivables to this partner continuously over a defined period. This not only reduces your operating costs but also ensures that you always have the liquid resources that your company needs.
