Why a company sells its invoices? You On Here » Why a company sells its invoices?

A company sells its invoices, even at a discount to their face value, when it calculates that it will be better off using the proceeds to bolster its own growth than it would be by effectively functioning as its "customer's bank." In other words, it figures that the return on the proceeds will exceed the income on the receivables.

Some businesses find a large variability in the inflow of cash and revenue. As a result, it might need to maintain a large cash balance on hand to cover its current cash needs when the cash flow is low. With a large variability in cash flow, there will also be instances that the cash flow will provide more than enough cash to meet all current cash needs.

Rather than maintain a large average cash balance to cover this variability in cash flow, the firm may find it may obtain a profit advantage by paying a finance charge when it runs into a low cash flow situation in order to reduce the amount of money that is not invested in some profit making venture.

Companies with a low variability in cash flow do not need to maintain a large cash balance to cover the periods of time cash flow is relatively low. These companies will find it more costly (in terms of lost profit) to pay the finance charge, and will tend to act as the "customer's bank" instead.

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