Receivables Factoring | 2022 Trade Finance Global Guide
What is receivables factoring?
Receivables financing (or accounts receivable finance) is a finance arrangement in which a company uses finance flowing in (such as from overdue invoices) to go into an asset financing arrangement. The word ‘receivables’ is often spoken about in corporates or commodity trading houses, but simply put, it addresses finance flowing to a company – through debts owed or the outstanding invoices.
Receivables Factoring - Overview
In relation to receivables factoring or receivables finance in a company structure, a ‘receivable’ is usually the cash that would flow into the company, or it’s the debts owed.
These are known as future receivables; the total sum owed to that company company.
As an example, if there is a financing structure put in place for an oil cargo company, then the receivables are the sale of the underlying oil or commodity, i.e., the sale proceeds or cash in return for the product. The end customers who owe the money to the oil cargo company are traders or buyers.
Why is receivables factoring important?
Companies might want to access some form of receivables finance facility to service working capital or cash flow gaps. Often larger corporates or end customers delay payments and have long payment terms.
When a business sends out an invoice or is owed money, it may take many months for this to flow into the company due to the time provided to pay or ‘credit terms’. The credit terms provided may be due to the length of time being industry standard or the counterpart being very strong and so demanding long payment days. In the SME UK market, one may see this with large supermarkets who typically demand 90 or 120 day payment terms.
For a business to operate efficiently, cash flow is key. Thus, many companies will discount invoices or receivables when they are sent out.
Operationally this will look and feel a lot like invoice discounting or factoring. When an invoice is sent out, the funder will factor or discount the invoice and provide a percentage of the value owed in the invoice up front to the company. By discounting a portion of this ‘receivable’, the company is able to grow.
Invoice factoring or discounting is one type of receivables finance. There are others used within structured transactions. However, when it comes to receivables factoring, invoices are essentially the discounted product.
Receivables factoring is a term used interchangeably with invoice factoring. In effect, it is when the whole ledger of invoices or debts are factored. Receivables or invoice discounting will conversely mean that individual invoices are discounted and this may be selective invoices or customers of a company; not the whole book.
- Cash flow from the business or lending
- Invoice finance
- Invoice discounting
- Export factoring
- Structured finance
Companies looking for receivables factoring are generally seen and reviewed (in terms of eligibility) on a case by case basis. Generally, a financier would ask for the following in an application:
- Audited financial statements
- Full business plans
- Financial forecasts
- Credit reports
- Details and references of the directors
- Information on assets and liabilities
Receivables factoring can reduce working capital constraints. Many companies which have small overdraft facilities or are funded through venture capital or equity investment might want to free up cash to fund the day-to-day operations of the business, and given the uncertainty around receiving payments, receivables factoring can ease cash flow constraints and ensure guaranteed payment.
All trade loans, however, are used to finance imports, exports, or other trading transactions.
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