IMPROVING LIQUIDITY USING TRADE DEBTORS

Venture Capital

Invoice discounting, factoring and the outright sale of trade debtors are both the traditional and new methods which businesses use to create liquidity through using their trade debtors.

Factoring:

A means of obtaining faster cash inflow, and thus increased funds. A firm appoints the factor to collect outstanding accounts payable and to administer debtors' accounts. It also lends money to the business based on the value of the firm's invoices.

The amount of funding is usually reasonably small and often has onerous conditions and costs attached and almost always requires the borrower to put up security and charges over the business.

Factoring, in simple terms, is an advance against current trade receivables (i.e. an advance bearing interest and attracting a suite of processing fees) and the transactions are "on-balance sheet". The receivable is reported under current assets whilst the loan is reported under current liabilities, which in most instances results in financial ratios deteriorating.

Invoice Discounting:

A service less comprehensive than factoring, involving the sale for cash of approved invoices to a financial institution.

Invoice discounting is a form of short-term borrowing often used to improve a company's working capital and cash flow position. This is a common finance tool or arrangement with a finance company or bank. It allows the bank to advance monies to a business against its debtors (customers) thus helping cash flow. The company usually continues to manage their own debtors.

Usually for good businesses with larger amounts of financing available, but normally still subject to onerous conditions and the same security arrangements as in factoring.

Confidential invoice discounting:

Incorporating all the attributes of Invoice Discounting together with a private agreement between a factor and its client which remains undisclosed to customers of the client.

Receivables Purchase Facility - a new alternative to traditional "factoring".

The Receivables Purchase Facility is on occasion mistakenly regarded as another Australian factoring product.

  • It is a version of "confidential invoice discounting" whereby current trade receivables are sold, rather than used as collateral for borrowings.

  • It comprises the initial sale of the current trade receivables ledger followed by the sale of subsequent debtor invoices on an ongoing basis. The receivables are converted into cash and there is no loan created.

  • Two major differences between this and factoring are liquidity and risk management with subsequent treatment in accordance to current international and Australian accounting standards. The sale of receivables usually becomes an "off-balance sheet" transaction if the debtors are derecognised in accordance with Australian Accounting Standard AASB 139 which complies with International Accounting Standard IAS 39.

  • Compared to factoring the Receivables Purchase Facility is more tailored for medium to larger corporates and provides substantial funding which normally does not require security to be provided by the business , and is provided at much lower cost than traditional methods.

 


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