Introduction

Managing accounts receivable (A/R) can be a complex and risky task for many businesses. Selling A/R to an embedded lender offers a streamlined solution that can mitigate credit risk, enhance cash flow, and automate accounting processes. In this guide, we’ll walk you through the steps to successfully sell your A/R to an embedded lender and highlight the key benefits of this approach.

Step 1: Understand Your A/R Portfolio

Before selling your A/R, it’s crucial to assess your portfolio. Identify which accounts receivable you want to sell, focusing on those with higher credit risk or longer payment terms. Understanding your A/R portfolio helps you determine which receivables are best suited for sale and maximizes the benefits you can gain from this process.

Remember: You don’t always have to sell your entire portfolio to the lender. In some cases, you may be able to sell only part of your accounts receivable and still maintain certain customer segments.

Step 2: Choose the Right Embedded Lender

Selecting the right embedded lender is vital. Look for a lender that integrates seamlessly with your ERP system to ensure smooth operations. Evaluate potential lenders based on their terms, fees, and support services. A good embedded lender should offer transparent terms and robust customer support to guide you through the process.

Important: Make sure the embedded lender can integrate directly with your ERP. If they cannot, you may be at risk of significant ongoing maintenance which will reduce any benefits from the sale.

Step 3: Integrate the Embedded Lender with Your ERP

Integration with your ERP system is a key advantage of using an embedded lender. Follow these steps to integrate:

• Work with your ERP provider and the lender to connect the systems.

• Ensure data is synced correctly to avoid discrepancies.

• Test the integration thoroughly to confirm that A/R transactions are accurately reflected in your ERP.

Automating the accounting of A/R through ERP integration reduces manual work, minimizes errors, and keeps your financial records up-to-date.

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Step 4: Prepare Your A/R for Sale

Preparation is crucial for a successful A/R sale. Gather necessary documentation, including invoices, payment histories, and customer information. Ensure your A/R is well-organized and presented attractively to potential lenders. This preparation can make your receivables more appealing and streamline the sale process.

Bonus: If you are already using an ERP that works with the embedded lender, this process may be automated. For customers that use Datacor, for example, their preferred embedded lending is integrated directly into certain A/R and A/P tables.

Step 5: Negotiate Terms with the Lender

Negotiating favorable terms with your lender is essential. Key points to discuss include:

• Advance rates: The percentage of the receivable’s value the lender will advance.

• Fees: Understand all fees involved to avoid hidden costs.

• Recourse terms: Determine if the lender requires you to buy back uncollected receivables.

Securing favorable terms maximizes the financial benefits and ensures a smooth transaction.

When negotiating, remember that the lender may not have the full picture of your business. You may have an advantage of working with certain customers for long periods of time and, in doing so, have established trusting relationships that the lender may not price in. If the lender gives you a bad rate, chances are they aren’t adept at risk-based pricing.

Tip: Ask the lender how they do their underwriting. If they are not using historical customer ordering patterns or advanced data modeling on top of your ERP history, chances are they will not be accurately pricing your receivables.

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Step 6: Execute the Sale

Once terms are agreed upon, execute the sale. This typically involves:

• Signing a contract with the lender.

• Transferring the agreed-upon receivables to the lender.

• Receiving the advance payment from the lender.

Ensure you comply with any legal or regulatory requirements during this process.

Look out for “delayed purchase prices” that will involve the lender paying you out, be it partially or totally, upon collection of the receivables. Lenders may promise a small percentage of the receivables upfront and remit the remainder upon collection from your customers. This can be customary, but make sure you review the agreement with your legal and financial advisors prior to agreeing to avoid any unsavory clauses.

Step 7: Manage Post-Sale Operations

After selling your A/R, manage post-sale operations efficiently. Maintain communication with your customers to ensure they are aware of the new payment arrangements. The lender will typically handle collections, but it’s important to stay involved to address any issues that may arise and ensure customer satisfaction.

In some cases, the lender will remain behind the scenes while in others the lender will take over the credit process on your behalf. It is important to weigh the pros and cons of bringing a third party into a customer transaction but, if you are able to find the right embedded lender, it can be a huge benefit.

Benefits of Selling A/R to an Embedded Lender

1. Remove Credit Risk

By selling your A/R, you transfer the risk of non-payment to the lender. This allows you to focus on business growth without worrying about delinquent accounts. According to a recent Atradius Study, more than 55% of invoices in 2023 were not paid on time, and with each delayed invoice comes added operational drag.

More than 55% of invoices in 2023 were not paid on time

Atradius B2B Payment Trends for 2023

2. Boost Cash Flow

Selling A/R provides an immediate cash infusion, enhancing your liquidity. Use this increased cash flow to invest in inventory, operations, or expansion.

3. Automate Accounting

Integration with your ERP system automates the accounting process. This reduces manual work, minimizes errors, and keeps your financial records up-to-date.

4. Control Customer Interaction

Maintain control over how and when customers are involved in the process. By involving customers on your terms, you enhance their experience and ensure they are informed and engaged.

Conclusion

Selling A/R to an embedded lender offers numerous advantages, including reduced credit risk, improved cash flow, automated accounting, and controlled customer interactions. By following this guide, you can streamline the process and unlock the financial and operational benefits of selling your A/R. Consider this option to enhance your business’s financial stability and efficiency.

Speed up cash collection with FundNow

Learn how you can get paid upfront on your sales invoices.

Learn more →