Receivables financing is when a business receives funding based on issued invoices. Those invoices refer to purchases made, but the payment hasn’t been received yet.
From an accounting perspective, there are:
- Accounts payable
- Accounts receivable
Practically speaking the difference depends on which angle of the invoice we look at.
Accounts payable means that the company (buyer) owes money to the supplier. Conversely, account receivable represents the money owed to the company.
To better understand the difference, let’s look at this example.
A printing company buys paper bulk to produce books. Then the paper manufacturer issues an invoice to the printing factory. On the balance sheet of the printing company, this specific invoice is an account payable.
Once the books are printed, the company sells them to a counterpart (Amazon). The printing company issues the invoice to Amazon. In this case, the invoice will be accounted as accounts receivable on the printing company’s balance sheet.
The way receivables financing works is relatively simple.
To avoid cash flow issues, the supplier has several options to consider. One is to sell the invoice to an invoice factoring company (the financial company). The financial intermediary is specialised in Trade Finance and provides several financing solutions. Have a look at the definition of trade finance company.
Let’s look at this example:
A business sells kitchen equipment to restaurants and hotels. They receive a significant purchase order by a national restaurant chain (the debtor). The debtor is willing to buy the equipment worth $400,000.
The restaurant chain needs the equipment right now but it can only make the full payment in the next 4 months. The supplier accepts the terms. Produces and delivers the kitchen equipment, and issues an invoice for $400,000 due in 4 months.
Understandably, if several other clients repeat this type of payment terms, the supplier might run into a cash flow shortage. Waiting for payments to be made can jeopardise the company’s ability to function.
The manufacturing company understands the difficult times and agrees to sell on terms. Both parties need to find middle ground during the negotiation. The parties agree on the terms and conditions of the financing.
There are few variables (among others) considered for each application:
- The creditworthiness of the debtor
- The length of the buyer/seller commercial relationship
The invoice factoring company will advance them $316,000 on the same day the supplier sells the invoice.
Then, when the debtor pays off the full amount on due time, the financing company will release the remaining $84,000 minus a factoring free.
By doing this, the supplier gets access to cash immediately. The client gets the equipment it needs and gets to pay later. The factoring company profits from the factoring fees. It’s a win-win-win situation.
Receivables financing with Velotrade
At Velotrade, we specialise in receivables financing and invoice factoring. We are an alternative to bank financing.
Traditional financing institutions, like banks and some insurance companies, offer receivables financing services. However, their onboarding process is lengthy and over-complicated. Sometimes they ask for additional documents and high-value assets as collateral. Furthermore, most banks lock their clients into long-term contracts. Traditional institutions bind their clients to sell all their invoices exclusively to the banks.
All these issues are off the table when partnering with alternative FinTech sources of funds. For example, Velotrade removes the disadvantages when compared to traditional receivables financing companies. Our onboarding process is seamless. We offer clients full flexibility. We allow them to fund only the invoices they want with transparent and straightforward fees and terms.
Here are some of the benefits of receivables financing
- Unlock funds tied in unpaid invoices. Instead of waiting for the payment date, you can have access to working capital as early as of today!
- No collateral assets required. Traditional institutions would usually ask for an endless list of assets to secure the transaction. FinTech companies do not ask collaterals to complete your application.
- A more accessible alternative to traditional finance. Not only Letters of Credit or Loans.
- Quick access to cash. It takes only a few days to process the application. Then you will receive the money directly in the bank account.
- Available to big and small-sized businesses.
Get started with receivables financing for your business today.
You can apply if you are a registered company that has been in business for at least 12 months. The company also need to generate a turnover of over $1,000,000 (USD). Furthermore, your buyer has a stable credit history and has been in business for at least 3 years. They need to generate a turnover of over $2,000,000 (USD).
If all the checks are in place, then you can apply for invoice factoring with Velotrade today!
All online processes through the Velotrade platform and it works as follows:
- Register your company (first time only)
- Create a new auction for the invoice you want to discount
- Velotrade verifies the details.
- Investors buy your invoice.
- Once the auction is complete, funds will be transferred into your bank account