An accounts receivables purchase agreement is entered in between a buyer and seller for the purpose of clearing off the sales amount and for claiming the sales proceeds by both parties. These agreements are usually tri-partite or may involve multiple parties i.e. the buyer, seller, administrators and/or services. The company essentially uses its receivables as collateral. In a typical accounts receivable transaction, the operation company creates a receivables account which when sold to the financing company, is legitimized by the purchase agreement.
A “Seller” will sell its goods to a customer making him the “Account Debtor”. A bank or other financier as “Buyer” will then buy that Debt up front through a Receivable Sales Agreement for an agreed Purchase Amount when the Debt eventually becomes due, payment from the Account Debtor will be directed to the Buyer rather than the Seller.
Purpose of an Accounts Receivables Purchase Agreement
Receivables sale agreements provide buyers with a profit-making opportunity, while sellers get security out of the same. This type of asset-based financing allows companies to get instant access to working capital without dealing with getting a business loan. When a business leverages its accounts receivables to boost its cash flow, it also doesn’t have to worry about repayment schedules. Instead of focusing on trying to collect bills, it can focus on other core aspects of its business.
Inclusions in an Accounts Receivables Purchase Agreement
An accounts receivables agreement is a complex financial structuring and hence requires various technical terms. Along with such technical terms, it is imperative to include standard boilerplate clauses such as Notice, waiver, remedies, dispute resolution, choice of law and severability.
Key Terms of an Accounts Receivables Purchase Agreement
The following are the key terms of this contract:
- Prime Rate: This interest rate varies. It is important for the companies in question to negotiate a rate that may guarantee profit for both the parties.
- Purchase date: It is another crucial part of the agreement that you must put into perspective. In normal cases, purchases are payable within more than 180 days. The factoring company is usually in charge of collecting and invoice payment on your accounts receivable. It is critical to know the reserve amount and how it is charged. A reserve amount is cash held, and it normally ranges from 2% to 20%.
- Account Balance: The gross amount of all Purchased Receivables unpaid on that day.
- Adjustments: It means all discounts, allowances, returns, disputes, counterclaims, offsets, defenses, rights of recoupment, rights of return, warranty claims, or short payments, asserted by or on behalf of any Account Debtor with respect to any Purchased Receivable.
Drafting of an Accounts Receivables Purchase Agreement
- The definitions should be adequately covered in the contract. Being a complex contract, the legal jargon used in this specific context should be explained properly.
- The offer and acceptance should be clearly mentioned.
- The reserve which would be created due to the sale of receivables needs to be mentioned in the contract.
- Repurchase obligations of the seller also need to be included in the contract.
- Any representations, warranties or covenants need to be included.
- Status of both the parties post-sale also needs to be included in the contract.
Benefits of an Accounts Receivables Purchase Agreement
By selling its future flow of receivables, a Seller can better manage its cash flow without the burden of a loan, which may contain more stringent conditions. A Receivable Sales Agreement structures function as a sale of assets rather than an increase in indebtedness for a Seller. Thus, a Seller can monetize future payables while ensuring its other assets remain unencumbered. But, the arrangement requires careful planning. Unlike a revolving loan, which can be drawn on at any time, receivable sales financing depends on there being receivables to sell.
Furthermore, Buyers may often charge more for a receivable sale agreement than a traditional loan. The company gets cash upfront and doesn’t have to deal with the hassle of collecting or the uncertainty of waiting
These agreements are extremely useful as they prove to be not only a secure method of ensuring repayment but also caters to many credits providing companies a ready method of capitalizing on specialization or compartmentalization of a sales contract. In the event of any dispute, litigation or arbitration may be resorted to.
Sample for Accounts Receivables Purchase Agreements
A sample of the agreement can be downloaded from below.
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Operating company represented by
Ms. Kaisa Harms
Address: 33501 S Dixie Hwy, Florida City, FL 33034
Contact number: (305) 242-4447
Financing Company represented by
Mr. Jason Newstead
Address: 2100 88Th St, North Bergen, NJ 07047
Contact number: (201) 758-2810
Terms and Conditions:
- Subject to the terms and conditions of this accounts receivable purchase agreement, the Seller may from time to time assign and request the Purchaser to buy Eligible Accounts Receivable either: (a) automatically, following the financial companies acceptance of a Financing Request; or (b) by choosing an Optional Financing Option.
- The financing company has the sole discretion to agree to purchase any Eligible Account Receivable and will have to indicate its agreement to purchase by depositing the Purchase Price of the Eligible Account Receivable on the Purchase Date into the Purchase Price Account of the seller.
- The seller or the purchaser can terminate this accounts receivable purchase agreement by giving 20 Business Days prior notice in writing to the other party. Termination of the agreement will be in effect on the expiration of the 20 business day notice period.
- The financial company or purchaser is not liable for any loss of business, profits, or information or any consequential, incidental, or indirect damages arising from negligence or breach of contract or otherwise.
- This Agreement shall be governed by and construed in accordance with the American law.
SIGNED FOR AND ON BEHALF OF SELLER BY:
SIGNED FOR AND ON BEHALF OF PURCHASER BY: