Receivables Financing: Definition, Kinds, Benefits and Importance

What exactly is “receivables financing”? You’ve probably heard this question a lot especially if you live and belong to the corporate world. For a start, it is a means of acquiring funds by and through one’s receivables either through a factor or by discounting them.

What separates them from bank loans is the fact that they do not affect liabilities or interest expenses but instead increase cash and decrease accounts receivables therefore it does not make your company’s financial statements unappealing.

receivables financing companyThere are basically two types to this: factoring and discounting.

Invoice Factoring – This receivables financing method involves the sale of one’s receivables to a third party in exchange for its value in advance. The factor, the third party in this arrangement, is able to buy the right to collect against the invoices of the said receivables from the customers from whom they are due. There are four more types under this umbrella:

  1. Recourse – In case of non payment by the customer, you are required to buy back its respective invoice. You shoulder any risk of non payment.
  2. Non-Recourse – The opposite of the former, here the factor bears all the risk making this a good option for those who have a lot of bad debts.
  3. Traditional – All of your invoices will be subject to the arrangement and the fees involved will be on a monthly basis.
  4. Spot – On the other hand, spot factoring involves only one invoice. You get to choose which one and it is a one-time transaction. Meaning, there will only be one fee which is to be deducted from the remaining balance of the invoice to be forwarded after the customer has paid in full.

Invoice Discounting – On the other hand, there too is a receivables financing method we refer to as discounting. Here, the receivables and their respective invoices are used as collateral for a loan. The amount of which is a percentage of the value of the invoices. Although this can technically be a type of loan, the effect it produces is quite different. It does not involve debt and an increase in the liabilities portion of your balance sheet. In fact, it has the same effects as factoring.

Receivables financing has gradually gained popularity as a funding method because of the benefits that it provides. To name a few these are zero debt, zero interest expense, lesser bad debts, quick injection of cash to one’s cash flows, simplicity and ease of application, improvement of balance sheet and of course the hastening of certain receivables which would otherwise take too long before fully collected.

Spot Factoring Companies: Guidelines, How To and Reminders

Under the umbrella of factoring is what we call single invoice or spot factoring. Instead of subjecting all of your receivables and their corresponding invoices to your chosen financing institution aka one of the spot factoring companies you have chosen, you only advance the value of one. In fact you even get to choose which and when you’d like to do it. You therefore have complete liberty. This is particularly beneficial for those who would need and want a onetime transaction. It is even popular for those who only have a few invoices that need hastening and would still want to retain ownership and control of most of their receivables. If you want to take advantage of this funding method then better read up on the following to get you better informed and well prepared for the arrangement.

spot factoring companies

  1. Get your document management right. Even if there will only be one invoice involved, the factors will still take into consideration pretty much a lot of things like is the receivable collectible? Is there big chance of it becoming a doubtful account? How long will it take for full collection to take place? All that can only be answered if you have kept and maintained an organized file of pertaining documents especially in terms of your receivables.
  2. Screen out your bad customers. You do not necessarily have to wipe them off your radar. They are still your customers but what makes them bad is the fact that they violate the credit terms extended to them. What’s a fix you may ask? Impose strict rules such as interests for untimely payments as well as rewards for prompt and early ones. This discourages tardiness and encourages on time payments. This way you are assured that most if not all of your clients pay their dues on time. Remember that this is important for the spot factoring company.
  3. Choose spot factoring companies well. Of course success will not only rely on your part. It is a partnership of both entities, you and the factoring institution. Make a careful research regarding companies that offer such services. Never go with the first name that pops in the Google search bar or the one that you see on top of the list in your local directory. You have to read up not only on their terms and conditions but also on reviews and feedback as well. It does not stop there too. Call them up and inquire. You should understand every bit of the engagement before you go into it.