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Apr 27
2010

The new look of receivables financing

Posted by dbedell in working capitalsupply chain financereceivables finance, cash management, Cash

dbedell

In addition to the buyer-driven supply chain finance models we discussed on Friday  – where a company sets up a program to help its suppliers finance their receivables - another big growth area is on the other side of the working capital spectrum – supplier-driven receivables financing. This is where companies look to finance their own receivables to increase available working capital and reduce days sales outstanding (DSO).

In this situation it is not the buyer who sets up a program, but the supplier who goes out to their banks or other financial institutions to initiate a receivables purchase program. From an FI perspective, receivables are generally ring-fenced, creating an asset-backed transaction where the company sells its receivables to a special purpose entity that sells the rights to future flows from those assets to the FI or investor. This disintermediates the buyer from the equation – it allows the supplier to sell receivables from its various buyers without the need for a specific financing agreement with each buyer and interaction with each buyer’s bank.

As with buyer-driven traditional supply chain finance programs, receivables finance has undergone a transformation through the help of portal technology and the influx of technology companies looking to redefine the rules for business-to-business financial interactions.

One of the biggest new developments in this area is the growth of receivables financing portals – such as The Receivables Exchange – where, upon approval, companies can log on and post eligible receivables for purchase by the financial institutions and investors that work with the portal to provide financing and buy receivables assets.

So, for example, after a company goes through the approval process, they could log on to such a portal, post receivables that are available for auction and set auction parameters – such as the timing, minimum advance amount and maximum fee – watch as the auction happens and investors bid on the assets, close the deal and receive their remittance within two or three days.

This can significantly reduce days sales outstanding (DSO) and increase efficient financial management of the supply chain. It automates much of the process, providing faster, easier-to-use data for reporting and control. As with other browser-based solutions, it is relatively easy to implement.

 However, there is a cost to such solutions. It adds another layer of intermediation, and that means more fees. Companies must decide whether the desire for quicker access to working capital is worth the fees involved.

Although on a broader scale receivables-backed future flow securitizations were affected by the crisis – spreads widened out dramatically, as with all asset-backed markets - it was one of the first to start to come back. As the impacts of regulatory, legislative, and ratings criteria changes in the US are disseminated, the full effect on future flow transactions, and thus receivables financing, have yet to be felt.  

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