Understanding the nuances of receivables purchasing arrangements, the difference between the different types of recourse, and the trade and receivables finance products available on the market is key to anyone in the asset backed lending space. Understanding legal obligations, security, and how different products can help lenders create funding structures which are helpful and useful to businesses to help them grow.
Receivables purchasing arrangements
What is Non recourse, limited and full recourse?
The open account market is a significant market opportunity, as we’ve seen a downturn in the use of LCs and guarantees.
A receivable is a legally enforceable right to receive payment from another person. There are two types of receivables: negotiable and non-negotiable receivables. This is a fundamentally important starting point for many financing structures.
Non-negotiable receivables include invoices and payment orders. They often have conditions and contractual restrictions, prior consent of the debtor may be required or the assignment of them may be prohibited.
In comparison to open account, there is usually no recourse from a legal perspective.
Where do the risks lie with differing recourse structures?
Forfaiting is a typical non-recourse product, using prom notes, bills of exchanges and letters of credit as typical instruments.
The seller risks include delivery in accordance to contract, such as performance risk, the payment risk (if sold without recourse).
The buyer has no right to disputes payment once the note or bill is signed, meaning there is a payment recourse.
Factoring and structured transactions with contractual restrictions are typical products for limited recourse transactions. Invoices and agreements with limited agreements are typical instruments.
Typical products include factoring and structured transaction, using invoices and agreements with legal limitations.
Full recourse has risks on the seller: delivery in accordance
Buyers may have the chance to dispute payments for full recourse transactions, depending on the instrument used.
What about credit insurance?
Limited recourse is not an obligation that the factor will not remove funding, they may exercise recourse, but they may not.
What is the difference between whole turnover and single invoice factoring?
Traditional factoring is based in a whole turnover assignment of debt: all clients invoices best in the factor as soon as they are created.
Single invoice factoring uses a facultative assignment, where the factor is not obliged to purchase the
The key advantage to the factor of
The advantages to the factor for facultative assignment are limited.
Supply chain finance: How is the trade cycle financed?
Financing the trade cycle is often done through supply chain finance, although the trade cycle takes into account ABL / inventory finance, supplier finance, receivables finance, supply chain factoring and purchase order financing.
Supply chain financing (SCF) is a
Supply chain finance delivers a strengthened stable supply chain and enhanced supplier relationships.
A financially stable supply chain reduces the risk of supplier failure and