Trade Receivables Financing Options

Numerous small and mid-sized businesses today are in need of financing, and banks aren’t exactly the best option. With banks, the loan application process can take a very long time. In addition, banks require collateral in the form of real estate or equipment. But with trade receivables financing, many SMEs have found a much more convenient way to increase their working capital and growth financing.

What are Trade Receivables?

In this type of financing, you can get the funding you need by using your trade receivables, which are essentially the commercial debts resulting from the sale of goods and services between your business and other companies.

These sometimes prove an attractive asset for your lender for several reasons. These receivables are self-liquidating, unlike other assets which may be more difficult to convert into cash. They are also generally short-dated, so lenders don’t have to wait long to get their money back. And finally, the volume of receivables can lead to revolving financing, while the range of receivables means you have a variety of ways to make use of them to get the money you need.

Types of Trade Receivables Financing

There are several kinds of trade receivables financing. The two most popular and well-known options are:

  • Factoring. This method involves a sale of the receivable at a discount, so it is not technically a loan. The way it works is simple. Usually, when you make a sale to another company, you deliver the goods and in return you issue an invoice which determines the length of time you need to wait before you will receive payment.

But with factoring, you don’t wait at all. The factor advances you about 80% of the value of the invoice immediately, so you can put that money to good use right away. Once your customer settles the account and pays for the goods in full, the factor then sends you the rest of your money, less the fees charged by the factor.

Factoring also has some variations as well. For example, you are usually obligated to pay back the advance if your customer doesn’t pay you because of bankruptcy. But in non-recourse factoring, that kind of nonpayment is a risk that the factor deals with, and you have no obligation at all in case of non-payment.

  • Invoice discounting. In many ways, invoice discounting is very similar to factoring. The main difference is in the collection process. In factoring, the factor usually takes over the collection process. They’re the ones who contact your customers and get the payment. This is an advantage to you if you don’t want to set up a collections department for your own company.

In invoice factoring, you’re still in charge of the collection process. This is an important point for some businesses where the relationships with customer-companies are extremely sensitive or delicate. You still deal with the customers directly and collect the payments yourself.

With trade receivables financing, the amount of funding you get depends on the quantity and quality of the receivables. Your own credit is not as important as the credit of your customers, so if you sell to established firms then you’re more likely to get the financing. And the more sales and invoices you generate, the more your funding grows to meet your needs.