Receivables Finance | 2021 Guide

Receivables Finance

Receivables Finance

Welcome to TFG’s receivables finance hub. Find out how our team can help your company unlock working capital from accounts receivable financing, on both a recourse and non-recourse basis. Alternatively, learn more about the different types of receivables and receivables finance: be that from a discounting or factoring perspective, or through our latest research, information and insights, right here, in our receivables finance hub.

What is receivables finance?

Receivables finance is a tool that businesses can use to free up working capital which is tied up in unpaid invoices. Receivables loans work for businesses in the case where unpaid invoices (accounts receivable) are used as collateral to release working capital, either as an asset sale or a receivables loan. A funder (bank, alternative lender, factoring company) are usually the facilitators in this.

Sellers face a major problem when buyers prolong their invoice payment for weeks or even months in some cases. In addition to running the risk of buyers not giving them full payment at the due date of the invoice, sellers must also fill the cash flow gaps that occur during this period.

Receivables finance offers a simple yet effective way out of this tricky financial situation for the sellers. It allows them to sell their outstanding invoices to finance providers or factors at a discounted rate. This way, sellers receive the remaining invoice amount before the due date of the invoice. The factors get their money back at invoice maturity through the sellers, acting as collecting agents, or directly from the debtors.

How can receivables finance benefit my business?

  • The receivables financier will sometimes take on the responsibility to look after your sales ledger which means more time to focus on the business
  • A receivables financier will conduct know-your-customer or due diligence on clients and suppliers, in order to assess and price any possible risk of default
  • Receivables discounting can also be done in a confidential manner (confidential receivables discounting), which means that your clients won’t know that you are using a discounting facility; one for consideration when it comes to reputation
  • Receivables finance can also help businesses grow their trade lines and fulfil customer orders without having to worry about working capital and cash flow cycles

Diagram: How receivables finance actually works

Receivables Discounting Diagram

We teamed up with the International Trade & Forfaiting Association (ITFA) to put together this diagram on how a receivables purchase agreement works between a buyer and a finance provider

Sellers deliver goods and services to buyers and request that lenders fund the outstanding invoices. The factors (financers) look at the invoice, perform the cost and benefit analysis and evaluate the risks of debtors before providing a cost of finance to the seller; or putting a finance facility in place. Receivables finance takes many forms, but usually the true sale (where there is no recourse to the supplier) is seen as receivables purchase. Once a facility is set up and the seller elects to discount or sell a receivable, the buyer pays the seller a nominal amount at a discounted rate known as receivables discounting. The remaining invoice amount is collected at the due date of the invoice by the seller and given to the factor. The diagram (figure 1) below illustrates how receivables factoring operates.

How can TFG help?

The TFG receivables finance team works with the key decision-makers at over 270 banks, funds and alternative lenders globally, assisting companies in accessing receivables finance facilities.

Our team are here to help you scale up to take advantage of both your domestic and international customers. We have product specialists based around the world, from automotive and vehicles, to media and data.

Often the financing solution that our clients may require can be complicated, and it’s our job is to help you find the appropriate receivables solutions for your business.

Read more about Trade Finance Global and our team.

Receivables Finance - Client Case Studies

MW Beers & Co.

Base Oil Trader

Clothing Company

Machinery Trader

Browse Case Studies

.

Get started – talk to our team

Contact Information

If you have an receivables finance enquiry, please use the contact form.

Otherwise, you can reach us on the email addresses below.

Trade Finance Global
201 Haverstock Hill
Second Floor
London
NW3 4QG

Telephone: +44 (0) 2071181027

Receivables Finance Enquiries



.

Want to learn more about receivables finance?

Look no further! Here you can find our latest features, receivables research and trending articles in the world of accounts receivables finance. So put your feet up, and dig in to the latest thought leadership and interviews from the TFG, listen to podcasts and digest the top stories in the world of receivables finance right below.

From the Editor - Receivables Finance Insights

FCI reports 6.6% drop in global factoring statistics in 2020 The first estimates for the factoring industry worldwide in 2020 have been announced today by the FCI’s Peter Mulroy. Factoring declines were recorded in most regions except Asia Pacific.
Model Law on Factoring: UNIDROIT’s Approach to Receivables Financing Factoring, as an important method to extend credit, is a type of financial transaction where the creditor assigns its receivables to an assignee at a discount. In recent years, there has been a large growth of factoring transactions around the world.
ICC, TFG and WTO release the latest research on trade digitalization facilitating MSME financing WTO, TFG and ICC have today launched their latest publication ‘Accelerating trade digitalization to support MSME financing’

Latest Insights

Videos - Receivables Finance

Invoice Finance Podcasts



Receivables Finance - Frequently Asked Questions

What's the difference between invoice discounting and invoice factoring?

Receivables finance includes factoring and discounting.

Factoring is present when a business assigns their invoices to a third party and the factoring company has full visibility of the sales ledger and will collect the debts when due.

  • The customer has knowledge that the invoices have been factored. (This is the typical route a lot of funders offer, however – some can offer Confidential Factoring)
  • Factoring gives businesses up to 90% pre-payment against submitted invoices
  • This enables improved cashflow, and reduces the need to wait for payment
  • The company may receive their funds up to two days after invoices are sent out. Many factoring companies will offer to send money same day (TT Payment, usually carries a charge) or by BACS (Free)
  • A business can choose a ‘selective’ factoring or invoice discounting facility, dependent on the funder.

Typically, with Invoice Discounting, the borrower will have more control over their ledger. Again – like factoring, there is the option to do this on a completely confidential basis.

  • Invoice discounting is an alternative way of drawing money against the invoices of a business
  • The business retains control over the administration of their sales ledger
  • Invoice discounting usually involves a company reconciling with their invoice financier monthly
  • With factoring – each individual invoice is uploaded – with Invoice Discounting, a bulk figure is uploaded and then drawn down against with the monthly reconciliations showing where money is allotted to
  • Under a selective facility a business can opt to factor (i.e. lend) or invoice discount just some of the submitted invoices
  • A selective facility is a good option if a business needs a certain amount of cashflow guaranteed each month or if one or two customers are good payers.

The main difference between factoring and invoice discounting is that with factoring, a funder will have full visibility of your sales ledger and maintain this by chasing debts on your behalf. Invoice discounting on the other hand, allows you to keep your credit control in house but as we already discussed, it would require a monthly reconciliation with the invoice financier. Naturally, management fees for invoice discounting are usually a lot lower, however a company must demonstrate they have the correct procedures in place to support an Invoice Discounting facility.

What is factoring?

Factoring solutions offer the seller of a receivable a wider service than just the advance of funds to shorten its cash conversion cycle as the entity buying the receivable will also usually take on the responsibility of collecting the debt.

Factoring can take several forms. For example, a factor may agree, subject to limits, to buy the whole of a seller’s receivables. This is known as whole turn-over factoring. Conversely, a factor may select which invoices he wishes to buy. It can be with or without recourse to the seller and may or may not be notified to the buyer or obligor.

The vast majority of factoring is domestic and individual invoices are often of a low value. Cross-border factoring is possible using the two-factor system. One factor is in the buyer’s country (known as the ‘Import Factor’) and the other in the seller’s country (known as the ‘Export Factor’). The two Factors establish a contractual or correspondent relationship to service the buyer and the seller respectively under which the Import Factor in effect, guarantees the receipt of funds from the importer and remits payment to the Export Factor. Typically, the two factors use an established framework such as the General Rules for International Factoring (GRIF), provided by FCI. Read more about factoring here.

What is invoice discounting?

Receivables discounting solutions tend to focus on shortening a seller’s cash conversion cycle, as opposed to encompassing debt management and collection aspects. The degree of disclosure to the debtor under this type of facility varies, ranging from full disclosure to no-disclosure, depending on the level of comfort taken by the purchaser of the receivables over the nature and standing of the seller. In most cases, the greater the control the financing entity/purchaser of the receivables manages to attain over the process, the better the discounting conditions offered.

A receivables discounting facility without disclosure to the debtor will grant the seller of the receivables full confidentiality, and therefore avoid reputational hazards. Most receivables discounting is without recourse to the seller so as to ensure de-recognition of the receivables from the seller’s balance sheet (so-called “true sale”) but recourse is normally retained for commercial dispute e.g. where the buyer refuses to pay because the goods or service are defective. Read more about invoice discounting here.

What are the advantages of receivables finance?
  • Sellers do not have to wait for the payment of invoice as factors pay invoices before invoice maturity at desirable discounts.
  • The early sale of receivables diminishes the risk positions associated with debtors.
  • Sellers are able to better manage their cashflow and do not have to worry about bridging liquidity gaps as receivables finance helps to free trapped liquidity.
  • Receivables factoring allows firms to expand their business by allowing debtors prolonged credit terms.
  • Sellers also receive insightful advice from factors about the credit strength of the debtors which assists them in striking better deals in future.
  • Receivables finance includes the translation of a company’s debts into cash without having any unwanted effects on the company’s business.
What are the disadvantages of receivables finance?
  • Profit from goods is reduced as the factor deducts a certain amount from the value of accounts due to be received, as fees for the service provided. In addition to this, interest is also charged on the advance made in some cases, which results in a loss of profit on the final amount.
  • Risks such as the credit wellness of the factor are beyond the control of the seller. A factor may withdraw credit advances due to poor credit ratings of a party in question.
  • Following the discounting of a receivable, the seller is no longer due the receipt of a payment from the customer. The seller also has no control over the book debts. This asset can no longer be provided as collateral while acquiring another type of finance.
  • In the case of recourse factoring, the seller’s liability is not completely waived. If a financier is unable to recover their debt from the factor, then they are legally entitled to obtain it from the seller. This leaves the seller liable to pay the factor, in case of non-payment. Such a situation would impact business projects already under execution.
  • Factors comes at a cost and may be more expensive than other forms of finance.
  • The buyer may not be willing to involve a third party factor or lender, due to their professional and strict dealing methods. Agencies send weekly reminders to the buyers for their debt, which will result in loss of personal touch that may present a negative image of the seller. Due to this the buyer may consider switching vendors which will be damaging to the seller.
How do interest rates work in invoice finance and how much is advanced?

Rather than waiting 30 – 90 days, an invoice financier can pay for most of the invoice amount up front, and the interest rate is the amount charged for this service. Interest rates are often linked to base rates the bank will pay for borrowing money, such as the LIBOR, as well as a management fee.

At first instance, receivables finance lenders can advance around 90% of the invoice amount value up front, whether that be through invoice discounting or factoring. Once the invoices are paid by the end customer, the borrower will be paid the remaining difference, excluding interest rate and management fees. Even if the company has existing finance arrangements such as an existing bank loan or overdraft, invoice discounting or factoring may still work for a business.

Normally, a lender will analyse the business prior to implementing a factoring or invoice finance facility. They may audit the financial records of the business and list the approved customers, and the decision is down to legal and contractual implications such as security and existing lenders.

What is the cost of a receivables finance facility?

The company should always read the offer letter and look at all (including the following) costs:

  • Discount costs
  • Service or management fees (including the minimum service fee which is normally derived as a % of the service fee)
  • Audit charges
  • Re-factoring charges
  • Transactional costs
  • Notice period for ending service and associated fees
  • Annual service costs
  • Trust account costs
  • Additional costs for services such as credit protection
What is needed for invoice finance?

There are three parties involved directly in receivables finance:

  • the funder who advances money against the invoice or receivable
  • the business (or customer) who sends out the invoice
  • and the debtor who is required to pay for the invoice

A brief explanation: The receivable, associated with the invoice for services or goods acts as an asset and provides the company the legal right to collect money from the debtor. A percentage of funds are then advanced against the value of the invoice.

Key Case Study: Receivables Finance

Virtual Creators Inc

Virtual Creators is a hardware start-up that is looking to expand its business. This firm sells its goods in mass quantities to online and brick & mortar retailers. They produce their goods in Shenzhen and have recently moved to a new producer in the region. Virtual Inc does not have any prior affiliation with this new manufacturer. The latter does not offer trade credit and requires immediate payment on the arrival of goods at the U.S. port.

Virtual Creators keeps its gross margins fixed at 40% at wholesale to their retail buyers. However, the retailers do not pay before the end of 60-day period after getting the product. Virtual Inc depends upon receivables finance to generate the cash required for the immediate payment that its manufacturer needs upon the arrival of goods at the U.S. port.


Strategic Partners:

Get in touch with our Receivables Finance team



Invoice Finance Hub – Contents

Download our free receivables finance guide



Our receivables finance partner

Latest News

21Apr

FCI reports 6.6% drop in global factoring statistics in 2020

0 Comments

The first estimates for the factoring industry worldwide in 2020 have been announced today by the FCI’s Peter Mulroy. Factoring… Read More →

07Apr

Model Law on Factoring: UNIDROIT’s Approach to Receivables Financing

0 Comments

Factoring, as an important method to extend credit, is a type of financial transaction where the creditor assigns its receivables… Read More →

30Mar

ICC, TFG and WTO release the latest research on trade digitalization facilitating MSME financing

0 Comments

WTO, TFG and ICC have today launched their latest publication ‘Accelerating trade digitalization to support MSME financing’… Read More →

22Mar

Podcast: Standby Letters of Credit (SBLCs) and their role in International Trade

0 Comments

We take a dive into the world of Letters of Credit (LCs) and Standby Letters of Credit – some of… Read More →

16Mar

What does 2021 hold in store for credit insurance?

0 Comments

Trade credit insurance remains critical in the economic recovery from the COVID-19 pandemic. Here’s why.
Read More →

16Mar

Using education to make factoring more inclusive

0 Comments

Teaching businesses to unlock working capital and grow their operations through factoring education programmes (FCI)
Read More →

16Mar

The post-pandemic evolution of supply chain finance

0 Comments

As MSMEs are weaned off fiscal support, a radical new attitude to how they access working capital will be needed… Read More →

16Mar

Trade as an asset class

0 Comments

Trade receivables securitisation to the rescue? Businesses will need to become securitisation savvy if we are to plug the trade… Read More →

16Mar

AfCFTA: the next chapter for African trade

0 Comments

As Africa enters a revolutionary period of intra-continental trade, factoring will be crucial to the growth of MSMEs.
Read More →

16Mar

What the pandemic means for future access to trade finance

0 Comments

The resilience of global supply chains lies with…ANY IDEAS? Alexander Malaket explains what COVID-19 means for future access to trade… Read More →

09Mar

Supply Chain Finance: Tarnished Beyond Redemption? …Only if We Collectively Allow It

0 Comments

The very public implosion of a high-flying boutique finance firm has left ripples in the Supply Chain Finance industry. Should… Read More →

10Feb

MSMEs seeking factoring credit should get ratings, finance panel tells Indian parliament

0 Comments

India’s financial parliamentary panel has called for the ratings agencies to regulate MSMEs seeking receivables loans and factoring credit.  With… Read More →

28Jan

Breaking: Corporate Payment Undertaking (CPU) defined by GSCFF

0 Comments

GSCFF updated its Standard Definitions for the Corporate Payment Undertaking (CPU), Dynamic Discounting (DD) and Bank Payment Undertaking (BPU)…. Read More →

26Jan

BCR’s Supply Chain Finance Summit – A roundup of Day 1

0 Comments

The two-day BCR Publishing Supply Chain Finance Summit got underway this morning, boasting important names from the supply chain finance… Read More →

20Jan

Etihad Credit Insurance and TDB cooperate to boost UAE and African trade

0 Comments

The Eastern and Southern African Trade and Development Bank (TDB) and Etihad Credit Insurance (ECI), the UAE Federal export credit… Read More →

11Jan

Bill Discounting vs. Invoice Factoring – What’s the difference? [Updated for 2021]

0 Comments

Both ‘bill discounting’ and ‘invoice factoring’ are types of financial instruments that are used to provide working capital to businesses… Read More →

04Jan

FCI and Afreximbank appoint Mr. Nassourou Aminou as Regional Manager for Africa

0 Comments

Amsterdam, 4 January 2021 FCI along with Afreximbank announce the appointment of Mr. Nassourou Aminou as the new Regional Manager… Read More →

10Nov

Global Supply Chain Finance Forum issues payables finance guidance to drive further clarity on terms and techniques

0 Comments

Global Supply Chain Finance Forum issues payables finance guidance to drive further clarity on terms and techniques… Read More →

29Oct

FCI: Best Trade Finance Innovator Global 2020

0 Comments

The CFI.co judges have conferred on FCI the 2020 award for Best Trade Finance Innovator Global 2020. Highlights of the judging panel’s findings include:  FCI… Read More →

15Oct

Podcast: FCI – Views from the Board, Factoring and Receivables

0 Comments

TFG’s Deepesh Patel caught up with FCI’s Chairman, Mr. Patrick de Villepin, and FCI Vice Chairman, Mrs. Daniela Bonzanini, on… Read More →

23Sep

SCHUMANN Interview: Robert Meters – Rethinking Credit Risk Management in 2020 and Beyond

0 Comments

TFG heard from Robert Meters on the significant role of trade credit insurance in the current economic crisis the global… Read More →

03Sep

Trade Finance Guide 2020 – Now Launched!

0 Comments

ITFA and TFG, today, launched their international trade finance guide, aimed at clarifying and defining standard definitions for trade finance… Read More →

01Sep

Podcast – GSCFF Commentary – The misuse of payables finance (S1, E49)

0 Comments

New report from GSCFF aims to address criticisms across three key areas: the potential adverse impact on suppliers, issues relating… Read More →

15Jul

Factoring in 2020 and beyond, industry update from FCI’s Secretary General

0 Comments

With factoring and receivables finance volumes continuing to show modest growth around the world, TFG caught up with FCI’s Secretary… Read More →

15Jul

Receivables finance – WOA’s Community Update for 2020

0 Comments

TFG heard from WOA’s founder, Erik Timmermans, on the latest in receivables and open account trade in 2020, the impact… Read More →

30Jun

WOA Survey 2020: COVID-19’s Impact on Factoring and Commercial Finance Firms

0 Comments

WOA took the initiative to survey members, partners and industry leaders in June 2020 about how the virus has affected… Read More →

30Jun

SME Crisis Playbook: Generating cash with trade receivables finance

0 Comments

SMEs need to re-think their innovation strategy including digitalisation as the pandemic has accelerated the shift to digital technology in… Read More →

25Jun

FCI publishes the 2020 Global Factoring Annual Review

0 Comments

The FCI Annual Review is a globally recognised publication in the world of Factoring and Receivables Finance. … Read More →

16Jun

Preventing duplicate financing of invoices and eWay Bills – India Factoring and MonetaGo join forces

0 Comments

Recently, Indian banks have had a number of high-profile fraud cases. In the first half of this year alone, there… Read More →

04Jun

Trade Credit Insurance backed by £10 billion guarantee for business-to-business transactions

0 Comments

Following several calls by business leaders and groups to provide state support for UK businesses, the UK Government have agreed… Read More →

Back to Top