Receivables finance

A company delivers goods in January and gets paid in April. In between it has spent the money making them and has nothing coming in. That gap sinks profitable businesses regularly.

Receivables finance fills it. A funder advances most of the value of the invoices as soon as they are issued, and is repaid when the customers pay.

The interesting part is whose credit is being relied on. The borrower may be small and unrated. Its customers may be large, established companies that pay reliably. The funder is really lending against those customers — so a small supplier to strong buyers can borrow on much better terms than its own accounts would suggest.

Not every invoice counts. Ones that are too old, that are disputed, or that are owed by a customer already representing too large a share of the book are excluded. And the funder never advances the full amount; the holdback is its protection against invoices that turn out to be worth less than they say.

The shapes

• Factoring — invoices are sold and the funder collects, so the customers know about the arrangement.
• Invoice discounting — the borrower keeps collecting and the arrangement is confidential, which most companies prefer.
• Supply chain finance — arranged by the large buyer, whose suppliers can be paid early at the buyer's own borrowing cost. A genuinely useful product and one worth reading the accounting on.
• Securitised programmes — the receivables are packaged and funded in the capital markets, which is a securitisation over a revolving pool.

Recourse, or not

If a customer does not pay, does the funder come back to the borrower? With recourse, yes — the funder is really lending to the borrower against collateral. Without recourse, the funder has taken the customer credit risk, usually backed by credit insurance. The two look identical in a cash flow statement and are completely different arrangements.

Eligibility, which is the product

• Age — invoices past a stated number of days simply stop counting.
• Concentration — no single customer above a share of the pool.
• Disputes — anything contested is out.
• Cross-age — if a large part of one customer's balance is overdue, all of it may be excluded.

Dilution

The gap between what is invoiced and what is eventually collected: credit notes, returns, discounts, disputes. It is the number that predicts trouble here, and it moves before anything appears in the accounts, because a company under pressure ships product that gets returned.

Why supply chain finance deserves care

A buyer arranges for its suppliers to be paid early by a bank, at the buyer's own credit spread. The supplier gets cash sooner and cheaper; the bank gets the buyer's credit; the buyer extends its own payment terms.

The accounting question is whether the buyer's obligation to the bank is still a trade payable or has become debt. Presented as a payable, a company can extend terms substantially and show no increase in borrowings — which is a real reporting issue and has been the subject of specific disclosure requirements after several failures where the scale of these programmes was not visible.

The product is legitimate and useful. The disclosure question is separate and it is the one a reader should look for.

Why funding lines can disappear at once

The facility is revolving and its size depends on eligibility. In a downturn, invoices age, disputes rise and dilution increases — so the eligible pool shrinks exactly when the borrower needs more. Availability falls without anybody cancelling anything, which is a quieter and faster form of withdrawal than a bank calling a loan.

Fraud, which is the honest risk

The whole structure depends on invoices representing real goods delivered to real customers. Invented receivables, or the same invoice funded twice by two funders, have caused some of the more spectacular failures in this market. Verification, audits and notification to customers exist because of it, and confidential arrangements — which borrowers prefer — remove the most direct check.

Where it fits

This is working capital rather than acquisition or investment finance, which makes it the most ordinary transaction on this desk and the one most companies actually meet. It is also the clearest illustration of the desk's whole principle: lending against a defined pool of cash flows rather than against a company.

The formulas above are standard textbook formulations, simplified for teaching. They explain the mechanism — they are not a valuation tool, and they will not reproduce a dealer’s price.