Accounts receivables financing is an advance or a line of credit secured against outstanding invoices. It helps to solve cash flow issues. These are often created by payments terms on invoices, meaning that after a business has provided a good or service they have to wait to be paid.
It goes by many names and often comes bundled with a lot of confusing jargon. It can be known as invoice finance, debtor finance or receivables finance. Not to mention invoice discounting and invoice factoring, which are slightly more specific terms. Then there is whole ledger or spot factoring and selective invoice discounting. And disclosed or non-disclosed. As well as recourse or non-resource facilities!
Let’s try and unpick some of the mysteries of the strange world of receivables finance!
It’s as old as money itself!
The sale of receivables has a long history. It is one of the oldest forms of commercial finance. The ancient Babylonians were the first to have unlocked the power of the invoice, around 4,000 years ago! Things may have moved on a little since then, but the basic idea remains the same.
A business supplying a good or service will raise an invoice to the company they are trading with, who then become their debtor. The debtor is required to pay the invoice amount in line with the specified payment terms, often 30 or 60 days. This creates a cash flow problem for the first business. They have carried out their work, yet have to wait to be paid. This can restrict their ability to carry out their operations.
Receivables finance is used by businesses to help them grow and expand.
It’s there to smooth out day to day cash flow bumps. It helps them purchase inventory, equipment and raw materials. It pays for operational expenses and helps them cover payroll.
The receivables financing company is interested in the creditworthiness of the debtors, as well as the quality and age of the invoices. Newer invoices are more valuable. Other factors they consider are concentration (the number of debtors, the more the better) and aging (how overdue the invoices are).
AR finance in Australia
It’s big business in Australia! The total industry volume for 2017 was over $75bn! Despite this enormous sounding number, the adoption of receivables finance is still much lower than other countries - that total is just 3% of GDP here, compared to almost 15% in the UK.
You might think this is down to Australian businesses having more secure cash flow, and whilst payment terms here are lower than the regional average (25 days), 84% of businesses report late payments from their B2B customers.
Types of accounts receivable finance
There are two main types:
Invoice factoring - This is where a business sells its entire accounts receivable ledger to a third party, known as a factor. The business receives an advance, usually 70-85% of the total value. Once the debt is paid, the factor remits the final amount, known as the rebate, minus their fees.
- Often used by small businesses, including start-ups, who need quick access to working capital to grow but other types of finance are unavailable to them
- Credit control and collections become the responsibility of the factoring company. They credit check customers, chase payments and deal with them on behalf of the business
The pros & cons of invoice factoring
|It provides a quick cash flow boost - giving business owners the opportunity to pay staff, cover operational costs and grow||Expensive compared to other types of business loan|
|The amount available grows as more invoices are raised||The amount available is limited by the value of the invoices|
|No fixed assets as collateral||Long term contracts (often 24 months)|
|The factor takes over the admin of credit control and collections||The entire ledger is usually funded, leaving little flexibility|
|A non-recourse facility can offer protection against bad debts||It exposes your situation to your customers|
|Relatively easy to obtain funding||It comes with a somewhat negative reputation|
Invoice discounting - Similar to invoice factoring, with one main difference; the financing company stays in the background meaning collections remain the responsibility of the business.
- Suited to slightly more established businesses than factoring
- The business retains control of its credit and collections
The pros & cons of invoice discounting
|It provides a quick cash flow boost - giving business owners the opportunity to pay staff, cover operational costs and grow||Expensive compared to other financing options|
|The amount available grows as more invoices are raised||Unlike factoring, no help with finance work / credit control|
|No fixed assets as collateral||The amount available is limited by the value of the invoices|
|Important customer relationships stay within the business||The entire ledger is usually funded, leaving little flexibility|
|Short term option without long contracts||Available to established businesses|
The Waddle Difference
Waddle offers a modern form of receivables finance. We've built an innovative invoice finance solution allowing businesses to close the cash flow gaps that are holding them back. The Waddle platform seamlessly connects with cloud accountancy platforms, like Xero & MYOB and generates a finance offer within a few clicks.
Once approved, Waddle offers an instant line of credit based on your unpaid invoices, which is adjusted in real-time as they are raised and paid. You pick the invoices to fund and only pay for those that you draw down. And thanks to the cloud accounting integration, bookkeeping is a breeze with no invoices to upload and instant reconciliation.
It’s also fully confidential, so your important client relationships stay with you. And Waddle offers the friendliest terms with no minimum monthly spend, no contracts or hidden fees, giving you fast and easy access to working capital and a healthier balance sheet with minimal fuss. Get an offer now!