Receivables Finance and Invoice Discounting
What is Receivables Finance?
Receivables Finance is a supplier-led financing solution where the supplier sells its trade receivables (unpaid invoices) to a financing institution at a discount, in exchange for immediate cash.
Unlike Payables Finance, this is initiated by the supplier, not the buyer.
Key Structures
#### 1. Factoring
- The factor (bank/specialist) purchases the full ledger of receivables
- The factor takes on credit risk (non-recourse factoring) or retains recourse to the seller
- The factor manages collections — customers pay directly to the factor
- The factor advances 80-90% of invoice value; releases remainder (minus fees) on collection
With Recourse vs Without Recourse:
- With recourse: If the debtor doesn't pay, the factor can claim back from the seller. Lower cost.
- Without recourse (non-recourse): Factor absorbs the credit risk. Higher cost, off-balance-sheet treatment for seller.
#### 2. Invoice Discounting (Confidential)
- Similar to factoring but the seller retains control of the sales ledger
- Customers are NOT aware their invoices have been discounted
- The seller collects payment from customers and remits to the financier
- More suitable for larger, credit-worthy suppliers
#### 3. Asset-Based Lending (ABL)
- A revolving credit facility secured against a pool of receivables (and sometimes inventory)
- The facility limit fluctuates with the borrowing base (value of eligible receivables)
Forfaiting vs Factoring
| Feature | Factoring | Forfaiting |
|---|
| Tenor | Short-term (30-180 days) | Medium/long-term (1-7 years) |
| Instrument | Trade invoices | Bills of exchange, promissory notes |
| Recourse | Can be either | Always without recourse |
| Volume | Multiple invoices | Individual large transactions |