receivables finance

What is Receivables Finance?

Receivables finance, also known as invoice financing, is a method used by businesses to manage their cash flow and improve working capital. This financial service involves a company selling its accounts receivable, which are the amounts owed by customers, to a third party. The third party, often called a factor, provides the company with an immediate payment based on the value of the invoices, typically between 70% to 90% of their total worth.

The Connection to Financial Factoring

Financial factoring is a form of receivables finance. Here, a business sells its invoices to a factor at a discounted price. The factor then takes on the responsibility of collecting the debt from the original customers. This not only injects quick cash into the business but also reduces the burden of chasing up payments, allowing the business to focus on core activities.

Benefits of Receivables Finance

The main advantage of using receivables finance is improved cash flow. Instead of waiting for customers to pay within their credit terms, which might be 30, 60, or even 90 days, businesses can access most of the funds immediately. This can be particularly beneficial for small to medium-sized businesses that require steady cash flow to maintain operations and invest in growth opportunities.

The Receivables Finance Process

The process of receivables finance typically follows these steps: A business raises an invoice for goods or services sold. The invoice is then sold to the factor. The factor advances a large percentage of the invoice's value to the business. The factor collects the full amount from the customer at a later date. Finally, the factor pays the remaining balance to the business, minus a fee for the provision of the financing service.

Is Receivables Finance the Right Choice?

Deciding whether receivables finance is the right choice depends on the nature of a business. It can be ideal for businesses that have long invoice payment terms or those looking to expand quickly. It's also suited for businesses that may not have extensive credit history and hence might find it difficult to secure traditional forms of business loans.

Conclusion

In summary, receivables finance offers a flexible funding solution that helps businesses to stabilize cash flow and reduce the burden of managing accounts receivable. By selling invoices to a factor, companies can access quick funds, support their growth, and allocate resources more efficiently to other areas of their business.