Receivables financing is when a business receives funding based on issued invoices. Those invoices refer to purchases made, but the payment hasn’t been received yet.
From an accounting perspective, there are:
The difference depends on which angle of the invoice we look at.
Accounts payable are when the company owes money to the supplier. On the other hand, account receivable represents the money owed to the company.
Accounts receivable financing allows companies to receive early payment on their outstanding invoices. A company using accounts receivable financing commits some or all outstanding invoices to a funder for early payment in return for a fee.
To give you a more clue in outsourcing accounts receivable services, Magellan Solutions has listed the primary types that we have handled for the past 19 years:
Also known as a business line of credit or traditional commercial lending.
It is an on-balance sheet technique and typically comes with significant fees. Companies commit the majority of their receivables to the program and have limited flexibility about which receivables are committed.
This is different than reverse factoring. It is when a business sells its accounts receivable to a funder but the initial payment is for less than the full amount of the receivable.
For instance, a company may receive early payment for 80 percent of the invoice amount minus processing fees. Compared to asset-based lending, companies have more flexibility in choosing which receivables to trade. But the funder fees can be high and credit lines may be smaller.
As with ABL, any factored receivables are recorded on the company’s balance sheet as outstanding debt.
Allows companies to pick and choose which receivables to advance for early payment. Additionally, selective receivables finance enables companies to secure advanced payment for the full amount of each receivable.
Financing rates are typically lower than other alternatives. This method may not count as debt based on the program structure. This is because selective receivables finance stays off the balance sheet. It does not impact debt ratios or other outstanding lines of credit.
The primary benefit of accounts receivable financing is that you collect most of the money owed in a short time. These funds are then available to pay expenses.
Because you sell the invoices, rather than borrowing against them, you do not pay any interest. Thus you do not have to list an additional liability on your balance sheet.
Factoring companies like us share the credit analysis. In return, you gain information that will be useful when doing business with these customers in the future.
In summary, accounts receivable financing can be a valuable tool for SMEs. Once you sell the receivables instead of borrowing, no credit history is required.
As a result, firms can even use receivables financing if they have tax liens or are in Chapter 11 bankruptcy
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