What is Receivables Financing?

Money plays a crucial role in every business. While a business might be profitable, that’s not to say it has all the money it needs to sustain itself and its growth. For ages, businesses have relied on conventional financing methods like secured loans to obtain funding for various functions such as payroll and expansion, among other expenses.

These financing methods have been tremendous for businesses but are outdated and rarely meet the business’s needs timewise. Getting approved for a loan takes a long time, not to mention the high-interest rates. Factoring companies have provided businesses with an alternative financing method that is easier to approve and takes a shorter time to get the funds. This financing method also saves businesses from the trouble of making monthly payments and instead leverages their outstanding account receivable. This financing method is called receivables financing.

What is Receivables Financing?

Receivables financing is a short-term financing solution businesses can use to gain access to working capital without subjecting themselves to the bureaucratic and time-consuming practices of conventional funding options like bank loans. Businesses can leverage their outstanding invoices to get funding instead of waiting for client payments using receivables financing.

Normally, businesses issue invoices for services or products provided and then receive the payment to settle those invoices from their customers and clients later. Depending on the business and the industry, the terms for these invoices can range from 30 to as much as 90 days. This creates a potential gap in cash flow finance, which can be a huge blow to the business’s operations.

With receivables financing, the business can transform its outstanding account receivables into cash through a financing facility using them as collateral. These receivables are the invoices issued to customers, but the payment hasn’t been made yet.

Differences between Account Receivables and Payables

An account receivable is money owed to a company by its customers, whereas accounts payable is money the company owes to its suppliers.

Receivables are current assets on a company’s balance sheet, while payables are current liabilities. In both instances, the liabilities and assets are short-term in nature.

Accounts Receivable Financing

Receivable financing allows companies to access payments due to them earlier through financing companies such as Key Factors. To access this facility, companies must meet certain requirements, and there is a fee attached to the service, which is how the factoring company makes its money.

Because financing companies are more business-oriented, they offer different types of receivables financing that suit various types of businesses.

Types of Receivable Finance

There are three main categories of receivable finance arrangements;

Asset-based lending

This is comparable to the more traditional forms of business lending with pricing relative to the receivables finance. However, it only works for businesses with assets of comparable value to the finances they seek. For such businesses, this funding method has many benefits on the balance sheet form of lending. Although larger fees can be associated, it is considered an extremely flexible form of funding.

Factoring

Another method of receivables finance that is quickly catching on is invoice factoring. With traditional factoring, the accounts receivable are leveraged to a factoring company, enabling early access to the payment of invoices through the funder. Some providers, such as Key Factors, will send you up to 80% of the value of the invoice upfront, allowing businesses to release locked-up cash. The service comes with processing fees but is somewhat more flexible compared to other lending methods and, most importantly, looks better on the business’s balance sheet because the financing method doesn’t appear as a liability.

Selective receivables finance

Over the years, factoring companies have worked to improve their services to serve their businesses better. This type of financing method, which is the main offering at Key Factors, is proof of this effort.

Selective receivables financing works the same way as ordinary receivables financing but allows the organisation to select the outstanding receivables for which they want to receive early payment. Selective financing offers numerous benefits to businesses, including increased liquidity and cash flow and taking control of their finances. More importantly, companies can receive on average up to 80% of receivables chosen up front, which doesn’t appear on the balance sheet, meaning it is unlikely to cause an effect on outstanding lines of credit.

How Receivable Financing Works

The process of getting receivables refinancing is a relatively simple one;

Facility sign up

You will need to sign up with your preferred factoring company. During the signup process, the company will work with you to assess your funding limit based on your individual business’s risk profile. The facility will then be set up with both parties’ agreed terms and conditions. With transparent options like Key Factors, you will also get a full disclosure of the fees and the percentage of financing you can get upfront on the receivables being financed.

The signup process takes the most time, with most companies able to approve or decline your request for financing within a couple of days. With Key Factors, you should receive a response within 48 hours of submitting your application.

Supple and invoice

Once your account is set up, you can go back to your normal business operations of delivering services and goods to your customer and raising their invoices as required.

Payment

You will supply the factoring company with a copy of the invoice sent to your customer, and according to the terms of the agreement, you will receive the agreed-upon upfront or advance payment percentage within hours. Key Factors sends the advance payment within 4 hours after submitting your invoice. The advance payment is up to 80% of the value of the invoice.

Invoice settlement

When your buyer settles the invoice, the financing company or funder receives the full amount being paid. The balance is sent to your account minus the financing company fees.

Benefits of Receivables Financing

With several financing options available, why should businesses seriously consider receivable financing?

It offers better liquidity

Businesses often seek additional funding primarily for liquidity reasons. However, the lengthy approval process puts the business under strain. Receivable financing is different. After going through the preliminary approval process, the financing company often credits your account with the advance payment within a few hours. This provides businesses with a quick injection of cash when they need it. With the help of receivables financing, waiting for up to 90 days for payment doesn’t have to be as disruptive or debilitating to the business.

Smoother operations

Businesses rely on a steady cash flow to take care of everyday expenses, pay suppliers and fulfil incoming orders. Without adequate cash flow, the business can’t keep up with its most basic and essential duties, such as making payroll. Receivable financing can help businesses maintain a positive cash flow by allowing them to leverage their unpaid invoices and get funds sent to their accounts within a short time to allow the business to meet its obligations and grow.

Risk management

Receivables financing is a great way to manage risk. As a receivable finance customer, your factoring facility provides credit control support, which minimises the chances of businesses delivering to customers with a bad credit history. The funder may also carry out credit control on each invoice on behalf of their client, sending out statements and chasing payments until it is paid. This reduces the chances of non-payment, which would ultimately hurt the business.

No fixed collateral

Receivable financing, particularly from Key Factors, doesn’t require any fixed collateral. Security is limited to the accounts receivables, so the business maintains access to all its brick-and-mortar assets. Not only does this shorten the process of getting working capital and make it less stressful, but it also allows the business to have all of its cards in its hands to take advantage of any opportunities where such assets might come in handy.

Short-term or long term

You choose how long you want to use the financing facility. Unlike business loans from banks that are often medium to long-term, you can choose to use receivable financing during a short financial turmoil or keep using it until your business has a healthier ledger and can sustain itself. There’s no time limit to how long you can use the facility, and it grows as the receivables in your business grow.

Greater opportunity

Accounts receivable financing allows businesses to take advantage of emerging opportunities to grow faster. With quick access to capital, businesses can easily take advantage of supplier discounts to make massive savings or use the funds to fulfil orders for new clients. The business can also choose to reinvest the money into the business to fuel its growth.

Final Remarks

Everything in the business world is advancing. There’s no reason why businesses’ funding and financing methods should remain traditional. Receivable financing is one of the innovative ways a business can access its operations without tying up its assets as collateral or having a balance sheet with substantial liabilities.

By working with the right factoring or financing company, you can get quick and efficient funding for your business without any limits on how to use the funds for your business.