Why This Is a Bad Idea
I know, it’s hard in today’s economy and the revenues just aren’t flowing in like they used to, but choosing to sell receivables to pay expenses such as in Infincom's case may not always be a good idea.
First off, once they are sold and are now being collected upon by a company that’s not your company, especially the current receivables, what does that say to your loyal customers? To some it may come across as a message such as “Don’t they trust me to pay my bills? Excuse me, I’ll go somewhere else!" And, if the new collector is more aggressive in collection procedures than you are, this may also leave your customers asking questions or questioning your company tactics.
As far as your lenders or possible funding down the road goes, if you need to sell an asset at a loss to pay expenses, they won’t look upon this as your being able to effectively manage and operate your business, so think twice before choosing this option. That's because once you do it, the journal entries will be on your books and you’ll have to explain why you sold receivables for cash.
Finally, for the small business owner who has receivables in the $5,000 to $10,000 to even $20,000 range, companies who buy receivables may not be interested in them – they may look at them as being too low when compared to your annual revenues (remember Infincom had $8.5 million in revenues). Plus, if out of the salable receivables you have and most are 60 days or more past due, these companies won’t be interested in purchasing them in fear of not being able to realize revenue on your bad debts.
My advice? Before you do this (and most small business owners out there are on a smaller scale than Infincom), talk to your banker. Have a sit down and see if there is any way he or she can help whether it’s pledging some collateral for a short-term loan or asking for some help for a few days until you can get back on your feet. Remember, your banker should be your best friend, so treat him like one; and when rainy days like these come around, they’ll be more willing to help.
If your banker does step up to the plate to help, and, say, covers your nut for three days, you'd better make sure you will have that money before you even accept the offer—better yet, make sure you will have the money before you even approach your banker. If you don’t, you won’t get the same friendly help the next time you ask.
So, have you sold your receivables or are you considering this option? If so, I’d like to hear what made you decide this was your only option or how it worked out for your company. Your comments will help other small biz owners seeking to do the same, so drop me a comment below. Your fellow small business owners await your experience and advice!