Receivables financing, also known as invoice financing, is a financial solution that enables businesses to unlock the value of their unpaid invoices. Rather than waiting for customers to pay within the agreed credit terms, businesses can access funds early by leveraging their receivables. This approach supports improved cash flow and operational efficiency.
Types of receivables financing
There are several forms of receivables financing, each suited to different business needs. Here are the most common options:
1. Invoice factoring
In invoice factoring, a business sells its invoices to a finance company (the “factor”). The factor advances most of the invoice value upfront, with the remainder (minus fees) paid after the customer settles the invoice. The factor also manages customer payment collection, making this option visible to customers.
2. Invoice discounting
Invoice discounting is similar to factoring, but the business retains responsibility for collecting payments from customers. Often structured as a confidential agreement, customers remain unaware of the financing arrangement.
3. Asset-Based Lending (ABL)
Asset-based lending involves using receivables as collateral to secure a line of credit or loan. This approach typically requires businesses to commit a significant portion of their receivables and often includes substantial fees. Receivables are recorded as debt on the balance sheet, limiting flexibility.
4. Traditional factoring
Traditional factoring allows businesses to sell receivables for early payment, usually receiving a percentage (e.g., 80%) upfront minus processing fees. This method provides more flexibility than ABL in selecting which invoices to sell, though fees may be higher, and credit lines can be smaller.
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By GlobalData5. Selective Receivables Finance (SRF)
Selective receivables finance enables businesses to choose specific invoices to advance for early payment. Unlike other options, SRF often facilitates full payment of receivables, typically with lower financing costs. Additionally, structured as a “true sale,” SRF may remain off the balance sheet, avoiding the classification as debt.
Why SRF is often preferred
Selective receivables finance offers distinct advantages compared to ABL and traditional factoring:
- Off-Balance-Sheet Financing: Properly structured SRF does not appear as debt on the balance sheet, preserving credit ratios and future borrowing capacity.
- Invoice Selection: Companies can choose specific receivables to advance, optimising cash flow without overcommitting.
- Flexible Participation: Businesses can utilise SRF as needed, which is particularly valuable during seasonal fluctuations or economic uncertainty.
- Access to Multiple Funders: SRF allows collaboration with multiple financing sources, reducing the risk of reliance on a single provider and encouraging competitive pricing.
How does SRF work?
Selective receivables finance is typically facilitated by advanced software platforms. These platforms automate the process, enabling businesses to sell invoices for early payment before their due dates. Transactions often occur without involving or notifying customers. The software can handle transactions across multiple currencies and jurisdictions, providing a seamless cash flow solution.
By enabling a “true sale” of receivables rather than a loan or factoring arrangement, SRF offers businesses a flexible and cost-effective method to manage liquidity and support growth initiatives.
