Receivables financing is one method used by a number of companies around the globe in order to draw out their needed funds. As its name suggests, the cash is driven from the entity’s own receivables. To some, this may still sound foreign but it has in fact already existed for years now. But what is it really and how does it work? Working Capital Partners is here to explain to us exactly that.
In receivables financing, companies actually hasten up the conversion or recognition of cash. Sales happen on credit and with this come the presence of customer invoices. It could however take time before cash is actually received as payment can come in periodical installments. Such funds may be needed by the entity for various reasons; funding operational expenses would be one. To do this they choose among two options: factoring or discounting.
With factoring, they sell the right to collect against the said invoices to a financial institution called a factor that in turn provides them with up to ninety five percent of the value of the customer invoices. The same proceeds to collect from the owing customers and once such has been completed they then will give the remaining five percent balance less any pre-agreed fees.
On the other hand, discounting is more akin to a loan only without interests and debts. What happens is the company uses the said invoices as collateral getting their value in advance from the financing institution. The company still proceeds in collecting from its owing customers and once this has been completed, they will then repay the financial institution plus nay pre-agreed fees.
To put it simply, it hastens and cuts short the turnover from receivables to cash. Receivables financing, both factoring and discounting also produces the same effects and benefits, to wit:
- It improves the entity’s cash flows thereby moving hand in hand with sales.
- It is fairly quick to use for as fast as twenty four hours and does not require the entity to provide financial statements or show their credit history and rate.
- Locked up cash is freed and made accessible and available for use especially for emergency cases.
- It does not affect the liabilities portion of the financial statements but rather only cause a decrease in trade receivables coupled with an equal increase in cash.
Thanks to Working Capital Partners, all these have been laid out clearly. So what are you planning to use? Factoring, discounting or both?