Extracted from the ACCA

Receivables Trading – How does it work? Uber uses an online trading platform to match a driver and a car to somebody looking for a lift. Receivable trading also uses an online platform to match a business with debtors/accounts receivable to an investor looking for a return. It is different to invoice discounting in a number of significant ways; principally it is cheaper and more flexible. The model is ideally suited to established SME’s with a multi-national company or Sovereign debtors. An average invoice discounter will have concentration limits and acceptable risk profile and will not accept business outside those parameters. If you take an Uber trip at quiet times it is cheaper than at busy times; receivables trading is also individually priced, making low risk (but perhaps concentrated) debtors cheap to finance and making finance available for even risky sovereign debt. For the funders, they can access an investment class that we would see appears on pension statements usually titled as “alternative investments”. For funders, it is an asset class that will perform independent of the main stocks and bonds and property asset classes and therefore reduce volatility for their fund. Online platforms allowing disintermediation, where the middle man is removed, in this case, the invoice discounter, is fast becoming the norm.


In a typical receivables trading example, a business will be able to trade 90% of approved Invoices and up to 70% of future Invoices irrespective of their size. The business controls the maximum discount by setting a reserve price – thus capping their cost of finance. Competition from a pool of institutional funders keeps the cost of finance competitive. The seller typically receives the funds within 24 hours. The Debtor still pays as per their agreed credit terms but into the platform segregated bank account. The unsold 10% of the invoice is paid to the sellers (SME) bank account immediately. The discount and a platform processing fee are agreed in advance. These are the only cost of funds.


Many established SME’s in Ireland have a relatively small number of large customers some of whom have extended credit terms. These blue-chip customers are often multi-national companies & state bodies – there is no issue about getting paid, the problem is how long it takes. There is also an issue that in a Brexit environment many SME businesses are starting to export to countries further away than the UK; invoice discounters may be unwilling to cover debts in more exotic countries even where that is a Sovereign debtor.


For years invoice discounting facilities have serviced working capital funding requirements. However, the facility comes with 3 major limitations: the facility limit; geographical restrictions; and debtor concentration risk limits. Invoice discounting is effectively a loan and the bank decides how much the facility is for. It requires a long-term commitment, often saddled with ‘non-usage charges’ or ‘exit fees’. The SME must often pay credit insurance and sign a personal guarantee. Country risk plays a major role in how traditional lenders assess the risk and granting of facility limits. If the country in which your customer is located is outside of what is considered in banking terms to be palatable, funding limits and exclusions will apply. The most common reason for restricting funding under an invoice discounting facility remains customer or debtor concentration. It applies when an SME becomes ‘over-exposed’ to a single debtor. The debtor could be a large household brand name but traditional lenders usually impose facility limit restrictions.


Receivables trading is not for micro-companies, typically debts of minimum €30k would be an entry point but there is an ability to consolidate smaller invoices to the same debtor. The accounting is benign as this is not a secured overdraft; it is a sale of an asset with recourse. Invoice discounting typically will be Dr bank and Cr loan – i.e. a loan secured on the debtors. Receivables trading will usually be Dr bank and Cr creditors but it can also be more complicated than that depending on the circumstances. With receivables trading, you can actually sell a sales order prior to having actually invoiced for the order or even having manufactured the goods, but as there is recourse, the Cr is to creditors.


Business is constantly changing and working capital funding has caught up. Alternative funding where sellers and buyers connect directly via an online platform is fast becoming the norm. Alternative funding should be part of the overall funding mix.


For more details contact Helen Cahill helen@invoicefair.com


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