What is accounts receivable financing?

Accounts receivables financing is an advance or a line of credit secured against outstanding invoices. It helps to solve cash flow issues, 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 full-ledger, partial ledger, 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 invoice/s to a third party lender, the lender will then collect on that invoice. The business receives an advance, usually 70-85% of the total value. Once the debt is paid, the factor remits the final amount, minus their fee.

  • 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 growExpensive compared to other types of business loan
The amount available grows as more invoices are raisedThe amount available is limited by the value of the invoices
No fixed assets as collateralLong term contracts (often 24 months)
The factor takes over the admin of credit control and collectionsCan damage customer relationships
A non-recourse facility can offer protection against bad debtsIt exposes your situation to your customers
Relatively easy to obtain fundingIt 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 growFixed costs. Often comes with a fee for all invoices
The amount available grows as more invoices are raisedUnlike factoring, no help with finance work / credit control
No fixed assets as collateralThe amount available is limited by the value of the invoices
Important customer relationships stay within the businessAvailable to established businesses
Short term option without long contractsAlthough some lenders insist on a minimum contract period with minimum fees

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!