David Estrakh, Express Trade Capital
Receivables are amounts owed to a business for goods provided or services rendered. Any time a seller delivers goods or services to a purchaser, and both parties agree to exchange payment at a later date, a receivable is created. It is common for the seller to send the purchaser an invoice (or bill) which represents the receivable and summarizes the details of the transaction. The invoice usually includes a description of the goods or services provided, the amount to be paid, and the payment terms or payment due date.
The owner of a receivable (i.e. the party to whom money is owed) does not have a valid receivable until they have first performed all of their obligations– the goods must be shipped to the customer and/or the services rendered. Invoicing customers prior to fulfilling their orders is termed pre-billing; using pre-billed receivables as collateral can cause problems with customers and lenders and may be considered fraud. Therefore, the seller can bill their customer and claim the billed amount as a receivable only after performing in full. Lenders can then advance cash against the receivables.
One of the factor’s main functions is to advance funds before the receivable matures and the corresponding payments are due. Essentially, factors speed up cash flow by making future payments available in the present. In addition to lending, many factors also secure receivables by providing credit protection, collections, bookkeeping, and other services related to the management of receivables. Such services help to control and protect the underlying collateral while offloading the client-borrower’s risk and outsourcing their A/R management duties. Once a customer pays an invoice, any balances still owed to the client are paid at that time and the receivable is closed thereby ending the transaction.
Factoring Example. Let’s say your company manufactures watches and just shipped a $50,000 order to a big-name retailer. You send an invoice to the retailer and then have to wait to get paid, usually 30-90 days. Instead, you can assign your invoice to a factor who will advance you up to 80% of the value of the open invoices and reserve 20% in the event of charge-backs or disputes. In this case, the factor could advance up to $40,000 and the remaining $10,00 will be paid to you once your customer pays the factor (minus the factoring fees and any charge-backs).
The above is a segment from our upcoming white paper, Factoring Basics, keep an eye out for the full piece coming soon!
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