Receivables Finance: Points to Consider Before Implementing a Programme

Published: January 03, 2025

Businesses can benefit from receivables finance in a number of ways, from optimising cash flow to supporting growth. But before implementing a programme, it’s important to explore the feasibility of this approach, and identify any possible pitfalls.

Broadly, this means looking at receivables finance through three different lenses: financial considerations, legal and accounting considerations, and operational considerations.

Financial considerations

First, consider the nature of your company’s working capital need, including customer payment terms, the seasonality of cash flows, and how much leverage you hold in the supplier-client relationship. As part of this exercise, ask the following questions:

• How is your working capital currently financed? For example, is this done through an overdraft or short-term financing facility, or is it part of a broader debt package?
• Do you have access to liquidity? Companies should review their financial situation, and this includes whether they are working with a single bank or have multiple banks queuing up for their business.
• What are your funding options? Depending on their operations, companies may have working capital needs in some countries or currencies, but not in others. Likewise, their ability to access financing might vary across different markets.
• Is it worth it? If the company is already well financed at a low cost by current providers, there may be little need to look at receivables financing programme.

Legal and accounting considerations

Next, look at the legal and accounting considerations of your proposed arrangement. In particular, review your top contracts to make sure there are no issues that could hinder receivables financing, such as:

• Prohibition of assignment. Some client contracts may prohibit you from selling receivables. If this is the case, you may be able to seek a waiver – but there is a risk that your client may either refuse or request a discount in exchange for the waiver.
• Retention of title. In some arrangements, suppliers will retain the title to goods until they have received payment. The purchaser of the receivables may not wish to proceed if someone else has a right to the goods.

Even if these issues do not apply, you will still need to find out whether your receivables are free and unencumbered. In some cases, receivables may already be pledged as a guarantee for another financing arrangement. Or there may be conditions that allow you to sell a certain basket of receivables, in which case you will need to check whether this is enough for your company’s needs.

In short, don’t start discussions with funders until you have a clear view of your current position. If you are confident that your receivables can be available for financing, you can go to your funders with a plan about how you intend to sell receivables. You would also have to outline the amount you want to release, your expected cost of funds, and what you intend to do with the proceeds. If needed, consider asking a trusted adviser to help guide you through this process.

Operational considerations

Finally, consider how your treasury operations are organised. When receivables are sold, funders will usually ask for the relevant collections to be paid directly to them or into specific accounts on which they will have securities. As such, you’ll need to find out whether it’s possible to grant security on the relevant collection accounts.

Other points to consider include:

• Impact of accounts structure on clients If you set up a new account, you’ll need to factor in how many debtors this will affect – if you have thousands of clients, it may not be feasible to ask them to pay into a different account in a short time frame. Alternatively, you may need to remove other debits and credits from your existing account so it is used only for the purposes of receiving collections.
• Existing cash pooling arrangements Issues can arise if the proposed receivables finance arrangement involves extracting certain accounts and flows from a cash pooling structure. The bank providing the structure may be unwilling to facilitate this if it means the structure leads to increased financial risk.
• FX impact Other considerations include the management of FX positions. For example, if debtors pay you in certain currencies, and the funding is in different ones , this can create a mismatch, and consequently an FX risk that will need to be managed. But it could also be an opportunity to raise financing in other currencies.

Last but not least, consider your organisation’s capacity to manage a receivables programme. For example, are your company’s systems sophisticated enough to provide the necessary level of information on the assets on an ongoing basis? If not, it might be worth exploring whether a reporting service could help you access the relevant information.

You may find that some parts of the company are stronger than others – in which case, the project could present an opportunity to create a level playing field across the business by sharing best practices and adding value beyond meeting your working capital need.