What Is Receivables Financing?
Receivables financing is a financial arrangement in which a business enters into an agreement with a factoring company and sells its account receivables or uses them as collateral for a loan. This factoring company gives the business advance cash, representing a percentage of the total value of unpaid bills. This percentage can range from 70% -90%.
It’s important to note that the term receivables financing is alternatively used for invoice financing.
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What are Receivables?
Receivables are commonly referred to as accounts receivables (AR).
Accounts receivables:
Accounts receivables are the money that the business has yet to collect. In a case, where a client has already received a service/ product from a business but has not yet paid for it. A business receives this money by generating invoices or bills. These bills are sent to the customer to be cleared.
Accounts payable:
You might have heard of a similar term, accounts payable (AP). You don’t need to go through it to understand receivables financing. However, let’s also explain this term to help you grasp the concept perfectly.
Accounts payable is the money that the business has to pay to its suppliers. So it’s an expense, and the money in accounts payable is going out of the business.
Types of Receivables Financing
There are two types of receivables financing.
Invoice financing:
Invoice finance refers to a business taking a loan against its unpaid invoices (account receivables). The lending party (aka financing company) releases up to 90% of the total value of the invoices upfront. The business collects the remaining amount from the customers. Check out our guide about advantages and disadvantages of invoice financing.
Note that a lot of times, invoice financing is alternatively used for receivables financing instead of its subset.
Invoice factoring:
Invoice factoring is a financial agreement in which a business sells its invoices (also called account receivables) to a factoring company at a discount and receives a portion of the invoice value upfront. The factoring company then keeps track of the pending payments and collects them directly from the clients. Check out our guide about advantages and disadvantages of invoice factoring.
Let’s look at the differences and similarities between both types of accounts receivables.
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The Process of Receivables Financing
Receivables financing works in 4 simple steps:
- Sell goods & services:The business either sells its goods and services to customers or uses them as collateral and generates invoices as usual.
- Receivables financing agreement: The business enters into an agreement with the financing company that verifies its unpaid invoices.
- The business gets the money: The financing company releases up to 95% of the invoice value upfront. The rest is paid (after fee deduction) once the invoices are cleared.
- Collection responsibility:In receivables financing, depending on whether it is invoice financing or factoring, the business collects invoice payments from the customers and bears responsibility in case of non-payment.
Benefits of Receivables Financing
Receivables financing offers the following key advantages for businesses:
Advance funding
It provides immediate access to funds, eliminating the wait for customer payments. This improved cash flow is particularly beneficial for small, growing businesses that need to manage their finances.
Affordability and simplicity
Receivable financing is cost-effective, quicker, and easier than securing bank loans or capital funding. The approval process is generally more straightforward, making it a viable option for many businesses.
Confidentiality
The process is discreet, with customer invoicing and payments proceeding as usual. This approach maintains the confidentiality of the financial arrangements, with the business retaining the responsibility for collecting payments.
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FAQs
Yes, you can. Receivable financing is a broad term, and invoice financing is its type. But a lot of times, the term receivables financing is used as an alternative term for invoice financing.
Receivables financing can help businesses in many sectors, especially those waiting a long time for payments or needing quick cash to cover their costs. It’s also really useful for smaller companies that might not have a big credit history yet and cannot qualify for bank loans.
The financing market has high competition, and many financing companies offer different rates.
Instead of going out into the market to search for suitable vendors, choose ComparedBusiness to compare quotes. Just submit your requirements in less than 2-mins and we will match you with the top financial institutions in the UK. You can pick and choose the best option as per your business requirements.
