A Step by Step Guide to Receivable Financing

Receivable financing in India is helping businesses grow and reach new heights, irrespective of whether they are big enterprises or small start-ups. If you’re interested to know how it works, follow the sections below!

What is Receivable Financing?

Receivable financing refers to the funding that companies receive based on invoices raised by them. An invoice shows supply of goods / services, consequent upon a sale transaction. In B2B context,  the seller usually offers a credit period to the buyer for making payment against the invoice.

In terms of accounting, the supplier (Seller) will have an account receivable in its balance sheet indicating that a buyer owes money to the supplier. Similary, the buyer (Debtor) will have an account payble in its balance sheet indicating money owed to the seller.

Let us give an example to make things clear:

If you own a printing company that produces books but buys paper sheets from a paper distributor on credit, the type of account you will be having is an account payable. On the other hand, the type of account the paper distributor will have in their balance sheet is the account receivable.

How Does Receivable Financing Work?

Differences in timing between supply and receipt of actual payment can result in cash flow problems for the seller.

Receivable Financing provides the seller funds against the invoice before actual payment by the debtor. The invoice discounting agency buys the invoice from the seller at a discount and pays the balance to the seller. The agency recovers its money, along with interest, out of the subsequent payment made by the debtor.

Here’s another instance to help you understand how receivable financing functions:

Suppose you’re the owner of a business (lets call it SELLER) that distributes home furnishing equipment to hotels (let’s call it DEBTOR). And you receive a daily order of almost 40,000/-.

Now, you need your equipment right away for distribution but you can’t pay the full amount to your seller (let’s call it CREDITOR).

You’ll be able to pay the full amount after one month or so. Here, you (seller) can contact a receivable financing company to get your invoices, raised on the hotel (debtor), discounted on an immediate basis to enable early payment to your seller (the creditor).

So, the companies providing receivable financing in India make an advance payment to you of an amount based on two variables: the tenure of your relationship with your debtor company and the creditworthiness of seller and debtor company. The entire process is known as factoring.

Benefits of Receivable Financing

There are multiple benefits of receivable financing. Here are the most common benefits listed below:

• Immediate Cashflow: You’ll get immediate cash flow to run your company operations seamlessly. Rather than waiting for your final payment date, you’ll get the needed fund right now.
• No Need for Collateral Assets: If you opt for receivable financing services, you don’t need to show any collateral assets. It is more evident if you partner with a fintech company.
• Perfect Alternative: Traditional financing is different from receivable financing. In fact, receivable financing works as an alternative to the former and that too in a more convenient way.
• Apt for Start-Ups: If you are owing a start-up company, receivable financing is the best choice for you. That’s because you will get immediate cash without any hassle of collateral assets.

So, receivable financing can aid your business operations in a simple way, helping you to unlock the funds that are already tied in all your unpaid invoices.

If you’re looking for this service from a reputed company, feel free to get in touch with us at Finworks360. As an online business funding solution provider, we are recognized as one of the most reliable companies offering receivable financing in India.