Sorting through the receivables finance noise

Why Receivables Finance

For many types of business finance, such as a Bank Overdrafts or Working Capital loans, Real Estate security is required and restrictive covenants are imposed on the business as part of the loan agreement. Apart from the inconvenience and overhead of these requirements, many businesses simply do not have, or are unwilling to commit, their Real Estate assets as security.

Receivables Finance does not require Real Estate security, and does not impose complex ongoing compliance requirements on the business. For these reasons it is an attractive alternative to other forms of finance.

Invoice Discounting

Invoice Discounting is a loan / advance taken out against the value of one or more outstanding invoices.

The key features are:

  1. The advance rate (ie the loan amount available) is typically between 80% and 100% of the invoice value.
  2. The collection and management of invoice receivables remains the responsibility of the borrower, not the finance provider. The financing remains confidential between the borrower and the finance provider, so the invoice debtor is not aware of the financing.
  3. The advance is typically repaid when the invoice(s) funds are received. The finance may be provided on a recourse or non-recourse basis;
    • Recourse funding means that, in the event that the funded invoice is not paid, the borrower remains responsible for repayment of the loan.
    • In a non recourse arrangement, there is no recourse to the borrower if the invoice is not paid. In these arrangements however, the borrower will be required to pay for credit insurance against the invoice(s).
  4. Loan security is usually provided by a non-specific or “floating”charge over the company's assets, and Directors' guarantees.
  5. Interest rates vary significantly in terms of both the rate and structure. Broadly, the rate will start at 2% per month.
  6. Fees also vary widely but may include origination fees, documentation fees, early repayment fees, audit fees and ad-hoc fees.

Factoring

Factoring is very similar to Invoice Discounting, with the key difference being that the finance provider assumes the management and collection of outstanding invoices. For that reason debtors are made aware of the factoring arrangement.

Factoring may be a viable option for those companies who don't have in-house accounting or accounts receivable functions, however many companies do not wish to use a third party for invoice collection, in particular companies who rely on a small number of key accounts.

Costs of factoring invoices are higher than invoice discounting due to the need for the finance provider to manage the debtors ledger.

Wrapping up

Receivables financing allows companies to access cash based on the value of their receivables assets. For companies looking for additional cash with minimal administration and without intrusive terms and conditions, receivables financing is an option well worth considering.