In today’s economic environment, defined by high interest rates, inflationary pressures, and geopolitical uncertainty, businesses across various industries face financial challenges. Amid this volatility, access to liquidity is crucial for sustaining operations and driving growth.
Demica's extensive data, with $160bn in trade volumes processed through its platform annually, illustrates the widespread impact of these economic headwinds. Many industries such as information technology and telecoms, and manufacturing have experienced a consistent downward trend in trade volumes, with professional services bucking that trend (see graphs below).
Source: Demica Sales Value Index (Jun 2023/24 = 100)
Receivables finance is a mechanism by which a business (a ‘supplier’) can raise money by selling, or borrowing funds secured against, all or part of its receivables book. Receivables finance solutions are typically used where a supplier has provided goods or services to a buyer on ‘open account’ payment terms, where the buyer has 30, 60, 90 or even 120 days to pay for the purchased goods or services following delivery.
In these circumstances, the supplier takes credit and payment risk on the buyer and may also suffer short-term liquidity issues when waiting for payment by the buyer. Receivables finance enables a supplier to manage payment risk in its supply chain and enhance its liquidity by either selling, or borrowing against, its receivables prior to their due date.
At its most basic, ‘purchase-based’ receivables finance will involve a supplier selling the receivables owed to it by one or more of its buyers to a funder (or to a special purpose vehicle, which is itself financed by a funder). In return, the funder (or SPV) pays a purchase price for each receivable, which will be at a discount to its face value.
The discount will be calculated to account for the perceived risks of credit and dilution as well as the agreed-upon remuneration of the funder. It is quite common in the industry that a funder would pay a certain percentage ratio of the invoice value at day 1 (for example 90%) and the balance as a deferred purchase price (this deferred purchase price often being referred to as a purchase price reserve) upon payment by the buyer (or default of the buyer in case of a non-recourse structure).
The sale of receivables to the funder (or SPV) may either be notified to the relevant buyer at the time of sale or only notified to the buyer upon the occurrence of certain ‘notification’ or ‘perfection’ events. Where the sale is notified to the buyer at the outset, the funder (or SPV) will typically take control of the servicing and collection of the receivable.
Where the sale is undisclosed to the relevant buyer at the outset, the supplier will retain control of the collections process on behalf of the funder (or SPV).
The use of receivables finance empowers treasurers to leverage payment terms that are typically beyond their control. By selling invoices to a third party, companies can immediately release liquidity on their balance sheets. Furthermore, there are many additional advantages that are often overlooked, such as mitigating credit risk, improving key performance indicators, and optimising the capital structure, which a Receivables Finance programme can also deliver.
Johannes Wehrmann is Demica’s head of corporate solutions
