What is Receivables Financing? How can a consumer get it?

Bill / Invoice Discounting, Receivables Financing, early payment for businesses by Credable

Receivables financing is a form of unsecured loan that uses the account receivable data to provide capital to businesses in need of liquidity. Let us take a detailed look.

In accounting parlance, a business may have

  • Accounts payable
  • Accounts receivables

A business may have multiple suppliers and may sell finished products to many buyers. Account Payable is the money that a business owes to its suppliers, while the Account Receivable is the amount it is supposed to receive from its customers.

There are two ways in which receivables financing works.

  • Factoring: Instead of using invoices as collateral, businesses can also sell the entire trade receivables account to a third party in exchange for funds. In the case of factoring, all default risk transfers to the financing company from the borrower.
  • Invoice Discounting: The account receivables are considered an asset and used as a guarantee for raising capital. In India, a majority of lenders use account receivables as a guarantee or collateral to provide funding.

Beneficial Attributes

  • No Collateral: Receivables financing is an unsecured loan and hence no security is required for funding.
  • Flexibility: Typically, account receivables financing is offered a revolving credit. The borrower is given a credit limit as per his/her trade receivables and he/she is free to utilize the amount. An amount can be withdrawn and completely or partially paid within a tenure. After repayment, the borrower is free to utilize the credit limit again.
  • Protection from Risks: If one chooses to sell the entire accounts receivable to the lender for financing, he/she is essentially protected from any defaults by the customers.
  • No Reflection in Credit History: One of the biggest advantages of receivables financing is that you get to raise capital and it is not recorded in your credit history. There is no negative impact of receivables financing on the credit history of an individual.

How to avail Receivables Financing?

The features and benefits are aplenty, however the larger question is how does a consumer receive receivables financing?

The advent of the Internet has brought receivables financing into common reach. One can easily seek accounts receivables financing options online as most of the lenders have set up digital portals. One just has to provide the relevant documents. The lender processes the documents and checks their veracity at the back-end and the disbursal is made within a day. The eligibility criteria for receivables financing is broadly similar for all lenders.

  • One must be between the age of 25 and 55 years
  • One must have a minimum experience of 3 years of running a business
  • One must have filed his / her income tax return in the previous year
  • One must have a good CIBIL score and a strong credit profile

Besides the basic eligibility criteria, lenders also look at the business turnover ratio. The ratio measures the ability of the business to collect the credit it has offered to its customers. The lender may also check the financial strength of the customers.

CredAble also provides working capital based on supply chain dynamics. Click here to know more.