Today, sellers of goods and services have to wait on average more than 60 days until their invoices get paid by their buyers (i.e. debtor). This can put sellers under financial pressure to bridge liquidity gaps during this time. Additionally, they are exposed to the risk of not receiving the payment from the debtor of the invoice at maturity.
One effective financial instrument for sellers to tackle these challenges is Receivables Finance (also known as Factoring, Receivables Discounting, Forfeiting), an accounts receivable-centric supply chain finance solution, where sellers of goods and services sell their receivables (represented by the outstanding invoices) to a finance provider (commonly known as the “factor”) at a discount, receiving their cash prior to the invoice maturity. At invoice maturity, the factor receives the full invoice amount either via the seller acting as the collection agent or directly from the debtor.
With receivables finance, sellers can optimize their working capital by quickly converting their open receivables to cash as well as effectively manage debtor risk by either selling all or partial amounts of their receivables to third party liquidity providers.
- Seller: The creditor of an invoice. In the context of receivables finance, the seller represents the vendor that supplies a corporate with goods or services and uses receivables finance to sell its invoices.
- Factor: The party providing liquidity to the receivables finance program and funding the seller’s invoices.
- Debtor: The debtor of an invoice. The debtor is not involved in the receivables finance agreement.
The Receivables Finance Workflow
The seller delivers goods or services and issues an invoice to the debtor (1). The seller uploads the invoice to the platform (2). The factors assess the risk of the debtors and bid on the receivables (3). The invoice is allocated to the factor with the best bid in a transparent and competitive auction model (4). The winning factor pays the seller the nominal amount minus the discount (5). At maturity the seller collects the invoice from the debtor (6) and pays the invoice amount to the factor (7).
Key Principles of Receivables Finance
Non-recourse vs Recourse Financing
Receivables finance can be provided to the seller on a “non-recourse” or “recourse” basis. In non-recourse receivables finance, the factor purchases the receivables from the seller and assumes the full debtor default risk. In a recourse transaction, the debtor default risk remains with the seller. Receivables purchased under a non-recourse agreement can generally be removed from the seller’s balance sheet.
Disclosed vs Undisclosed Financing
In a disclosed setup, the debtor is made aware of the transaction and often pays directly to the factor at invoice maturity. In an undisclosed receivables finance transaction, the debtor is unaware of the sale of the receivable to the factor and still assumes that the seller remains the owner of the accounts receivable. In such a case, the seller acts as the collection agent for the factor and collects and transfers the debtor maturity payment to the factor.
Depending on the debtor’s risk profile, factors do not discount 100% of the invoice but determine a “payout ratio”, a security margin, to account for cover for credit deterioration or dilutions (i.e. any reductions to an invoice that is not a credit loss). In case the factor receives a full maturity payment the remaining payout to the seller is executed.
Trade Credit Insurance
Trade credit insurance is often used to mitigate risks in a receivables finance transaction. Insurance policies usually offer 85% to 95% insurance to cover the losses due to the debtor’s credit risk. Trade credit insurance policies can be either held by the factor directly, or by the seller (where the factor, as a co-insured, is entitled to the payments under the insurance).
Advantages of Receivables Finance
- Debtor specific risk positions can be actively mitigated through the premature sale of receivables
- Factors pay invoices fast at attractive discounts and sellers no longer have to wait for their accounts receivable to be paid by the debtors
- Receivables finance releases previously trapped liquidity, enabling sellers to actively manage and improve their cashflow
- Optimize working capital by reducing DSO (days sales outstanding)
- Potential to provide extended credit terms to its buyers and grow business with those buyers
- Manage risk by transferring the debtor risk to the factor
- Possibility for balance sheet management by generating liquidity without creating additional leverage
- Benefit from attractive alternative investment opportunities in the short-term market
- Benefit from a credit exposure with a lower risk profile, due to the supply chain related nature of the underlying transaction
CRX Markets Product Offering
CRX Markets offers a full-range working capital finance solution that enables corporates to optimize their accounts receivable (receivables finance) as well as their accounts payable (reverse-factoring, dynamic discounting). For all products, the offering includes the following services:
- Full automation through seamless integration to the core systems of all relevant parties to ensure a fast, scalable, and reliable process
- Completely digital onboarding process to reduce workload
- Best-price determination by leveraging auction theory during financing
- Straightforward costs with no hidden fee for maximum transparency
- Close and continuous support through our client support
Key Facts and FAQs: Receivables Finance
The seller of goods or services.
- Receivables finance helps the sellers to optimize their working capital and reduce risks in their debtor portfolio.
- Sellers can reduce their days sales outstanding and benefit from attractive financing rates.
- Factors generate attractive returns on short-term risk, gain access to an alternative asset class, further diversify their portfolio, and improve their relationship with seller entities.
The key differentiator between receivables finance and reverse factoring is the risk position. Reverse factoring removes any supplier risk by approving the invoice and providing an irrevocable payment obligation to financiers, whereas receivables finance includes a debtor’s and a seller’s risk as well as processual risks, e.g. collection and commingling risk (risk that the debtor pays but the investor does not receive the money).
Receivables finance is a tool commonly used in companies to achieve working capital optimization or to manage debtor risks. Historically receivables finance was relying on manual processes and market participants were often lacking transparency of the corresponding transactions which led unattractive prices. With the introduction of digital solutions to manage receivables finance programs that automize processes, provide transparency, and allow for price competition, receivables financing is a supply chain finance tool ever more attractive for corporates acting in the globalized markets.
At CRX we have developed a receivables finance program that enables the sellers to sell their receivables on a non-recourse and undisclosed basis to a group of connected factors at competitive prices.