ADS’s guide for receivables finance refers to loans secured against the receivables of a business. The collateral utilised by the lender are the aged receivables of the business.
The Process of Receivables Financing
In receivables financing, the debtor finance lenders assess the collateral strength of the receivables of the business and whether those receivables will be collected irrespective of the future performance of the business. After an initial review by the receivables finance provider, indicative terms are typically issued that will fund against a percentage of the receivables ledger. A commitment fee is typically charged by the lender to commence detailed due diligence.
The focus of the lenders due diligence is the collectability of the receivables. Quite often the private lender may contact a number of the customers of the business to check that the invoices they have booked as receivables are genuine and that payment of those invoices will be made by a certain date. Lenders often conduct onsite due diligence of the borrower to audit the historical raising and payment of invoices to see if there have been disputes with customers on the payment of invoices.
Closer to settlement of a facility, borrowers are typically set up with an online portal for them to upload future invoices into, to submit these invoices for future payment. Receivables finance facilities are dynamic in nature as when customers pay the business, the funds are first applied to pay-down the drawn debt associated with the funded invoice. Lenders typically ask the borrower to instruct their customers to pay any future invoice payments into a bank account that is controlled by the lender.
What to Watch out for in Receivables Finance
1. Disputed invoices
It is important that borrowers have a good understanding of how receivables finance products work before they commence a process to secure funding under this structure. If the borrower believes there is any chance that the invoices they are submitting for funding can be disputed, they should not proceed as this creates significant red flag warnings for the private lenders that operate in this sector.
2. True cost of funds to the borrower
Although the headline interest rate can be reasonable for debtor finance providers, there are additional monthly management fees and fees levied for each invoice submitted for finance that increase the total borrowing cost to the borrower. Quite often it is difficult to determine the underlying borrowing cost for the facility as it is dependent on a number of factors including the frequency of invoices raised by the business and the credit terms with their customers.
3. Available funds
Receivables finance lenders may advertise a limit on the funds they are willing to lend against the receivables ledger of a business – say up to 80% of the invoice value, however borrowers are often disappointed with the amount available on initial settlement of the facility due to invoices that are deemed ineligible by the lender. These could include invoices that are more than 90 days old, invoices from related parties or suppliers, or where the lender believes there is a risk to their collateral security when they try to collect on the invoice.
Other Areas of Interest
- Find out more about receivables finance
- Explore ADS’s receivables finance transactions
- Contact us to apply for receivables finance loan