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If you`re a business owner, you know how important cash flow is to the success of your business. But what happens when you need access to cash but don`t have the money on hand? That`s where a purchase and sale of future receivables agreement comes in.

A purchase and sale of future receivables agreement, also known as factoring, is a financial transaction in which a company sells its future receivables to a third-party buyer at a discount in exchange for immediate cash. This can be a great way for businesses to access cash quickly without taking on additional debt.

How It Works

First, the business sells its accounts receivable, which are unpaid invoices or other debts owed to the business, to a third-party buyer. The buyer pays the business an upfront sum of money, typically a percentage of the total value of the receivables sold. The buyer then takes over the collection of the receivables from the customers.

Once the invoices are paid by the customers, the buyer collects the full amount of the invoice. The difference between the amount paid upfront and the total amount collected is the buyer`s profit.

Benefits of a Purchase and Sale of Future Receivables Agreement

One of the main benefits of a purchase and sale of future receivables agreement is the ability to access cash quickly. This can be especially helpful for businesses that have a lot of outstanding invoices or other debts but need cash to pay bills or invest in their business.

Another benefit is that factoring is often easier and quicker than applying for a traditional loan. There are typically fewer requirements and less paperwork involved, so the process can be completed fairly quickly.

Potential Drawbacks

While factoring can be a great option for businesses, there are some potential drawbacks to consider. One of the biggest is the cost. Buyers typically charge a fee for their services, and the percentage of the receivable sold can be high. This means that the business may not receive the full value of the receivable.

There is also the potential for customer relationships to be affected. If the buyer is aggressive in their collection tactics, it could sour the relationship between the business and its customers.

Conclusion

Overall, a purchase and sale of future receivables agreement can be a great tool for businesses that need access to cash quickly. However, it`s important to weigh the potential costs and drawbacks before deciding if it`s the right option for your business. As always, it`s important to consult with a financial advisor or attorney before making any major financial decisions.