1. Receivables Financing
Know Your Product
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2. Receivables Financing – Simple Concept
A owes money to B
B says to C “A owes me money; can you advance me funds and when A pays me, I’ll pay you with interest?”
C gives B money
A pays B
B repays C, with interest
Everybody is happy!
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3. Receivables Financing – Definition
Supply Chain Finance is defined as the ‘use of financing and risk mitigation practices and techniques to optimise the management of the working capital and liquidity invested in supply chain processes and transactions. SCF is typically applied to open account trade and is triggered by supply chain events. Visibility of underlying trade flows by the finance provider(s) is a necessary component of such financing arrangements which can be enabled by a technology platform’.
Standard Definitions for Techniques of Supply Chain Finance - Global Supply Chain Finance Forum
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4. Receivables – An Easily Financed Asset
Known value
Self liquidating in a short period of time – 30/60/90 days
Often better credit rating than selling/borrowing entity
Generally available as a portfolio so risk spread
Can be insured to reduce risk further
Gives liquidity where in less liquid industries/geographies
Can be purchased or borrowed against with or without recourse to the seller
Low risk so should have keen pricing
Different structures available
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5. BUT Wide Range of Options – Need to Know What is Most Appropriate
Different techniques - receivables discounting, forfaiting, factoring and payable finance
With or without recourse/limited recourse?
Borrowing or purchase or ABL or securitisation?
Insured or uninsured – credit insurance has waiting period; catastrophe cover
Retain credit operations or factor or forfait?
Portfolio or specific credits?
Would you like fries with that or ketchup or mayo, do you want a side salad…
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6. More to Think About……
Position vs other borrowings (asset already pledged; financial indebtedness prohibited?)
Do your contracts with customers restrict or prohibit assignment of receivables – do you want to avoid that in the first place when negotiating contracts?
On or off balance sheet? True sale – satisfy IAS 39/IFRS 9
Which law – English, other jurisdiction, is an assignment needed?
Specific terms – definition of ineligibles; reporting requirements
Dilution rates – does the nature of your business require regular credits
Concentration – reliance on one or a small number of large customers
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7. ….And More to Think About…….
Cost – just interest or fee per invoice?
Advance rate %? 90%? 85%?
At what point does receivable become receivable? On shipping, on delivery, on order? Are INCOTERMS relevant?
What documentation is required to prove a receivable to permit finance
What reporting requirements are there – daily, weekly, monthly
Due diligence – these aren’t CDO’s!
Provisions, cancellable limits, uncommitted facilities…..
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8. …And More to Think About
Facility rises or falls with level of receivables – may be coming down when you need funds most
Disclosed or undisclosed
If disclosed, what will my customers say? - Aren’t receivables facilities just for companies going bust?
Product returns – lender issue
Can I finance contract receivables?
Can I not just have a revolving credit facility instead….?
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9. It’s Not All Bad Can be very flexible
Pricing can be very good as opposed to overdraft or similar
Does work well for lower credit risk customers (but….)
Excellent for high growth companies – can alleviate the issue of overtrading
Well established products with known documentation
Major developments happening – Fintech disruption, investment funds outside Basle 3 rules and capital weighting, watch this space….
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