Receivables Finance Offers Extensive Working Capital Value

By Matteo Greco
Product Marketing Director

Late payments from customers can negatively impact both a company’s cash position, as well as its working capital. If such behavior persists, then the business and its financial health could be in danger. Receivables finance is a useful strategy to mitigate this risk.

What Is Receivables Finance?

Receivables Finance is a technique that provides organizations with the ability to convert their outstanding accounts receivables (AR) into cash either by selling the receivables to a financial institution at a discount or using the receivables as collateral against a loan or advance.

When does Receivables Finance make sense?

Receivables Finance is useful for sellers (B2B) anytime their receivables have longer payment terms (i.e., greater than 30 days), or when liquidity deficits call for accelerating the use of the AR funds before collection is due. Sellers can take advantage of liquidity to help fund operations and strategic spending, while keeping the use of debt to a minimum. Other key attributes of a receivables finance program can include enabling sustainable growth, balance sheet optimization, transferring/lowering of risk, improved metrics like days sales outstanding, and filling gaps from insufficient credit lines. These can help drive extremely valuable business cases from many perspectives across finance and the business.

What are the types of Receivables Finance?

Receivables finance programs offer countless flavors based on the arrangements between sellers, factors and credit insurances. Two primary categories are most common:

  • Purchasing Receivables: A cash advance associated with a single or multiple outstanding AR
  • Asset-Based Lending: This uses receivables for collateral against a term loan or other credit vehicle.

Among those two main categories there are three common types for receivables finance:

  • Factoring: Sellers cede the entire portfolio of outstanding AR of one or multiple customers to one or more factors. In exchange, the seller receives a cash advance minus interests and fees for the same factors.
  • Invoice Discounting: Similar to factoring, but in this case, the seller can decide which specific invoice it is willing to cede to the factors. The seller is under no obligation to cede the whole portfolio for a specific debtor.
  • Securitization: This is the practice of taking a portfolio of receivables and transforming them into a tradable asset (i.e., obligation) and selling into the financial market via an intermediary called “Special Purpose Vehicle” (SPV).

Further, two other important attributes among receivables finance programs include disclosures and how liabilities are defined:

  • Disclosure:
    • Disclosed program: the sale of the receivable is notified to the customer (obligor of the invoice)
    • Undisclosed program: the sale of the receivables is not notified to the customer (obligor of the invoice)
  • Liability for Debtor’s Default:
    • Program with Recourse: the Seller is liable for a default payment of a debtor
    • Program without Recourse: the Factor is liable for a default payment of a debtor

How Do Receivables Finance Programs Work? An Example :

Eligible receivables are ceded to factors against interest and fees. Factors can have arrangements with sellers to finance the entire amount of the ceded AR or part of the invoice amount based on the advance rate (i.e. only 90% of the amount of the ceded invoices). Additionally, a factor may apply concentration criteria (i.e. no single customer can have more than 10% of total outstanding portfolio) or customer limit criteria (e.g., up to €50 million for customer A, $100 million for customer B, £140 million for customer C, etc.). Typically, there are multiple characteristics that determine interests and fees, but surely the customer’s credit risk plays the most important role and it is inversely proportional to the interest rate.

Why Is Receivables Finance Even More Relevant Now?

For the past 15 years, interest rates have been very low. Consequently, using debt as a source of liquidity was less costly and more easily used. Following the COVID-19 pandemic and various geopolitical factors, we have seen a dramatic increase in interest rates. This effect has had two main consequences:

  • The cost of debt has increased, resulting in putting even more pressure on corporate cash flows. This has directly impacted revenues and margins.
  • Access to liquidity is not as easy as it used to be. In fact, it is not granted at all.

What can corporates do to cope with the increasing cost of debt and less access to liquidity?

  • Long-term: Put a strategy in place to ensure even more credit quality, take care of the balance sheet and get ready to monetize some assets.
  • Short-term: Corporates should look to working capital optimization to address the two main liquidity issues (cost and shortage). Reducing the cash conversion cycle (CCC) and leveraging receivables finance programs will provide faster access to cash.

What does Kyriba Receivables Finance offer?

In accordance with Kyriba’s long-term vision to provide corporates with a single platform for enterprise liquidity management, we launched our Receivables Finance module in 2022. The module adds another element to the Working Capital Cockpit on top of Payables Financing (Supply Chain Finance, Dynamic Discounting, Hybrid).

Kyriba’s fully integrated Receivables Finance solution enables corporates to unlock funds tied up in outstanding accounts receivable (AR), converting those assets into cash quickly. Sellers can automatically connect their ERP systems and centralize all receivables finance programs into one single portal via integrated multibank connectivity. Users aren’t required to change online funding portals or send emails to perform a receivables sale, inquire about limits or request drawdowns from one or more existing credit facilities. The system allows users to consolidate documents, segregating eligible ones from non-eligible. Corporates remain in control of their receivables finance programs, generate automatic accounting entries and customized reports in a Factor-agnostic platform.