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.

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