Stay Liquid with Receivables Financing

2007-03-08 10:33:40

( Insurance )



If you are managing a business, you know how important it is to have enough cash on hand for daily operations, so that you will be able to meet current obligations or unexpected expenses.

Even the most profitable business enterprises will experience cash shortages at some point in time. A main reason for this shortage is that most of the company's sales may be tied up under its accounts or notes receivables. In most cases, it may take you a month or more to collect these receivables. On the other hand, you still have to pay your own suppliers and debtors on time. Failure to do so can put a dent on your company's credit record.

Fortunately, you can use your company's receivables to generate cash for your company. There are several ways to obtain receivables financing.

Pledge of Receivables

This method works just like mortgage financing, wherein you treat the receivables as collateral to get a bank loan. You pledge all your receivables to the bank who in turn advances you the money net of processing fees. As you collect on your customers' receivables, you also turn over the collected funds to the bank to repay the loan. The bank earns on the interest and processing fees charged to you.

Assignment of Receivables

This is similar to pledging, except that you assign only specific accounts to serve as your collateral. The bank selects the accounts it wants you to assign. Depending on your arrangement with the bank, your customers may or may not be notified about whether they should pay you or the bank directly. You still take responsibility to collect from your customers and to pay your bank accordingly.

Discounting of Notes Receivables

In this type of receivables financing, you endorse your customer's promissory note to the bank for discounting. The bank will advance you the money net of the discount fee and keeps the promissory note. Upon the note's maturity, the bank can collect from your customer.

Discounting transactions can be either be with or without recourse. "With recourse" means that you are obligated to pay the bank in case it is unable to collect from your customer.

Factoring of Receivables

In factoring, you sell your receivables to a factoring company or factor. The amount of factoring is slightly lower than the actual collectible amount to allow the factoring company to earn a commission from the transaction.

You are technically transferring the ownership of the receivables to the factor. The factoring company notifies your customers about the transaction and assumes the responsibility of collecting the receivables directly.

And since factoring is on "without recourse basis", the factor has the right to evaluate the nature and quality of your receivables before agreeing to "buy" them from you.

Except for factoring, the above types of receivables financing require both you and your company to have a satisfactory credit standing before they can accommodate your receivables.


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