Accounts Receivable Purchase Contract

ContractsCounsel has assisted 283 clients with accounts receivable purchase contracts and maintains a network of 164 business lawyers available daily. These lawyers collectively have 31 reviews to help you choose the best lawyer for your needs. Customers rate lawyers for accounts receivable purchase contract matters 4.87.

The accounts receivable purchase contract is a financial arrangement in which a company sells its accounts receivables to a third party, known as a factor. It is also known as accounts receivable financing or factoring deal. The firm gives the factor the right to collect payments from its clients in exchange for instant cash. Read on further to learn more.

Mechanism of Accounts Receivable Purchase Contract

Here's a breakdown of how an accounts receivable purchase contract works.

• Agreement: The firm seeking funding agrees with a factor that is either a financial institution or a specialized factoring company. The agreement outlines the terms and conditions, including the fees, advance rate, transaction duration, and any unique criteria or constraints.
• Invoice Submission: The firm chooses which invoices to sell to the factor and submits them for review. Invoices indicate the customers' due sum for products or services to the firm.
• Evaluation and Approval: The factor decides whether to authorize the bills for financing based on the creditworthiness of the company's consumers since their capacity to pay influences the factor's choice. Factors may consider customers' payment history, financial stability, and credit ratings.
• Cash Advance: The factor advances the firm cash payment after accepting the invoices. The advance amount is often a percentage of the invoice face value, typically from 80% to 90%. If the approved invoices total $100,000, the firm might obtain an instant cash advance of $80,000 to $90,000.
• Payment Collection: The factor collects payments from the consumers indicated on the sanctioned invoices. When customers make payments, they send them to the buyer rather than the corporation. The factor oversees the collection process and communicates with consumers about payment instructions and deadlines.
• Deductions and Remittances: When the factor receives consumer payments, it deducts its costs specified in the contract, which generally include discount fees, administrative fees, and interest rates on the cash advance. The factor remits the remaining funds to the corporation. This payment is usually made regularly, such as weekly or monthly.
• Credit Risk: The factor estimates the credit risk connected with the invoices in an accounts receivable purchase contract. It implies that if a client fails to pay or goes insolvent, the factor will suffer a loss after acceptance of the invoices. This feature is advantageous to the firm since it passes credit risk to the factor lowering the company's exposure to bad debts.

Benefits of the Accounts Receivable Purchase Contract

There are several advantages for both company and the factor of entering into a accounts receivable purchase contract, including:

• Improved Cash Flow: Businesses may transform their unpaid bills into quick cash by selling their accounts receivables. It provides a fast infusion of capital that a company may utilize to meet operational expenditures, invest in growth prospects, or solve short-term financial concerns.
• Working Capital Access: Accounts receivable finance enables businesses to access on-hand cash without incurring extra debt. Instead of waiting for consumers to pay their bills, which might take weeks or months, they receive an advance payment from the buyer. It allows them to increase their cash flow and support their continuing activities more effectively.
• Reduced Administrative Burden: Managing accounts receivable and following down late payments may be time-consuming and resource-intensive for organizations. Companies can unload collecting and related administrative obligations by collaborating with a factor. It frees up internal resources, allowing the organization to concentrate on crucial functions such as sales and operations.
• Transfer of Credit Risk: One of the primary benefits of accounts receivable financing is the transfer of credit risk. When a corporation sells its invoices to a factor, the factor is in charge of collecting payment from clients. If a client fails to pay, the factor suffers the loss protecting the organization from future bad debts and enhancing credit risk management overall.
• Flexible Finance Option: Accounts receivable finance is a flexible financing option that may adapt to a company's changing demands. The capacity to change the amount of funding based on the number and quality of invoices provides scalability to support business development. Furthermore, unlike traditional loans, accounts receivable finance often does not demand collateral or personal guarantees.
• Creditworthiness: In accounts receivable finance, the factor considers the creditworthiness of the company's customers rather than the company's financial health. That can be advantageous for small or new enterprises with a minimal credit history or who fail to fulfill typical loan criteria.

Benjamin W.

Faryal A.

Jane C.

David B.

Essential Considerations for the Accounts Receivable Purchase Contract

Consider the following before getting into an accounts receivable purchase contract:

• Cost and Fee Structure: Examine the contract's costs, such as discount fees, administrative fees, and interest charges. Understand how these charges affect your profitability and cash flow. Compare the expenditures from different aspects to ensure you get a good deal.
• Impact on Customer Relation: Consider how changing the buyer collecting payments may influence your customer relationships. Some clients may be accustomed to working with your firm directly and may be concerned or confused about the shift. Keep open contact with your consumers, offer clear payment instructions, and swiftly handle problems to retain strong connections.
• Suitability for Your Business Strategy: Determine if accounts receivable finance for your business strategy and cash flow requirements is appropriate. The benefits of accounts receivable finance may be restricted if your company depends mainly on upfront payments or has short payment terms. Consider alternative funding choices that better meet your unique company needs.
• Financial Stability of the Component: Select a trustworthy and financially stable component. Perform due diligence on the factor's track record, financial health, and industry reputation. A dependable factor will give continual assistance, fast service, and an effective collecting procedure. Working with a financially unstable component might cause interruptions and influence your cash flow.
• Contract Terms and Flexibility: Carefully analyze the contract's terms and conditions, including the agreement's duration, notice periods, termination provisions, and any limits or limitations imposed. Check that the agreement's terms allow you to change the funding arrangement as your firm grows.
• Secrecy and Disclosure: Understand the amount of confidentiality and disclosure involved in the accounts receivable acquisition contract. Buyers usually connect directly with your consumers, risking the disclosure of certain information about your business and finances. Ensure that the factor respects the confidentiality of sensitive information and follows all legal and regulatory standards.

Key Terms for Accounts Receivable Purchase Contracts

• Advance Rate: The advance rate is the proportion of the invoice face value the factor will offer as an instant cash advance to the firm.
• Discount Rate: The factor's fee, also known as the discount fee or discount rate, is the amount levied by the factor for acquiring the invoices and is charged monthly or annually.
• Purchase Obligation: In contested, uncollectible invoices, or conditions like contract breach, the factor reserves the requesting right that the firm repurchase particular invoices.
• Recourse: In Recourse finance, the firm is responsible for any outstanding bills if the buyer fails to collect payment from the clients.
• Non-Recourse: Non-recourse financing means the factor accepts the credit risk and absorbs the loss if clients default.

Final Thoughts on Accounts Receivable Purchase Contracts

The accounts receivable purchase contracts enable businesses to unlock the value of outstanding bills, manage cash flow, minimize risks, and drive success as organizations confront shifting problems and opportunities. Companies may position themselves for long-term growth and success by utilizing the benefits of these contracts and carefully assessing the underlying aspects.

If you want free pricing proposals from vetted lawyers that are 60% less than typical law firms, click here to get started. By comparing multiple proposals for free, you can save the time and stress of finding a quality lawyer for your business needs.

ContractsCounsel is not a law firm, and this post should not be considered and does not contain legal advice. To ensure the information and advice in this post are correct, sufficient, and appropriate for your situation, please consult a licensed attorney. Also, using or accessing ContractsCounsel's site does not create an attorney-client relationship between you and ContractsCounsel.

Need help with an Accounts Receivable Purchase Contract?

Meet some of our Accounts Receivable Purchase Contract Lawyers

Jeremiah C.

Jeremiah C.

Creative, results driven business & technology executive with 24 years of experience (15+ as a business/corporate lawyer). A problem solver with a passion for business, technology, and law. I bring a thorough understanding of the intersection of the law and business needs to any endeavor, having founded multiple startups myself with successful exits. I provide professional business and legal consulting. Throughout my career I've represented a number large corporations (including some of the top Fortune 500 companies) but the vast majority of my clients these days are startups and small businesses. Having represented hundreds of successful crowdfunded startups, I'm one of the most well known attorneys for startups seeking CF funds. I hold a Juris Doctor degree with a focus on Business/Corporate Law, a Master of Business Administration degree in Entrepreneurship, A Master of Education degree and dual Bachelor of Science degrees. I look forward to working with any parties that have a need for my skill sets.

Ramanathan C.

Ramanathan C.

Dual Qualified New York Attorney & Enrolled NZ Barrister & Solicitor

Mark D.

Mark D.

Partnering with business clients to keep their greatest asset - their employees - from becoming their biggest liability. Mark accomplishes this by working with in-house counsel and human resource professionals of several Fortune 50 companies, as well as many smaller public and privately held profit and not for profit organizations, to provide advice and counsel on the day to day employment and workforce practice issues encountered by those organizations. For over fifteen years Mark has been Board Certified in Labor and Employment Law by the Texas Board of Legal Specialization. He is licensed and practices in both Texas and Colorado and has focused his practice for the last 20 plus years on defending companies in employment and labor related matters. During this time Mark has had extensive experience in handling and responding to a wide range of local, state and federal employment issues that impact the management and operations of businesses in a wide range of industries. Mark's experience includes appearances before state and federal agencies and regulatory boards, litigation in both state and federal courts, defense of class actions and appearances before courts of appeal. While Mark regularly handles matters in litigation, he has a high regard for handling every issue with the best interest of the client’s business. Mark is a published author and regular speaks on labor, employment and workplace practice topics. Whether it be an investigation by the Occupational Safety and Health Administration (OSHA), the Wage & Hour division of the U.S. Department of Labor, or other state agency; an Equal Employment Opportunity Commission (EEOC) or state agency charge claiming a violation of local, state or federal employment or labor laws; or the need for direction on a hiring, termination or business operational issue involving employees, Mark has extensive experience in handling these and many other employment and labor issues.