FAQs
Why would a company sell its receivables?
There are several reasons why a company might sell its receivables:
To raise cash
Selling receivables can be a quick and easy way for a company to raise cash. This can be especially helpful for companies that are experiencing a cash flow shortage or that need to fund a large project.
To improve liquidity
Selling receivables can help a company improve its liquidity by converting a non-liquid asset into cash. This can make it easier for a company to meet its short-term obligations and to take advantage of new opportunities.
To reduce risk
Selling receivables can help a company reduce its risk of bad debts. If a customer defaults on a receivable, the company that sold the receivable will not be responsible for the loss.
To improve efficiency
Selling receivables can help a company improve its efficiency by outsourcing the collection process. This can free up the company’s resources to focus on other core activities.
To gain access to specialized services
Some companies that purchase receivables offer specialized services, such as credit analysis and collection services. This can be beneficial for companies that do not have the expertise or resources to manage their receivables effectively.
To meet regulatory requirements
In some cases, companies may be required to sell their receivables to meet regulatory requirements. For example, banks may be required to sell receivables to maintain a certain level of capital adequacy.
To take advantage of tax benefits
In some cases, companies may be able to take advantage of tax benefits by selling their receivables. For example, companies may be able to defer taxes on the gain from the sale of receivables.