Luckily, there’s some good news. One solution to this problem is gaining traction in international supply chains. It’s called accounts receivable (A/R) financing. A/R financing closes the financial gap between buyers who want open account terms and suppliers who want immediate payment. Here’s how.
Accounts receivables – the balance of money a buyer owes a supplier for goods delivered – can be a sticking point for companies trying to grow.
While suppliers want to get paid up front, buyers don’t want to pay until they’ve sold the goods. The resulting financial gap impacts smaller suppliers in developing regions who don’t have the clout of a larger buyer. That’s why they turn to A/R financing, to unlock working capital that would otherwise be stuck in unpaid invoices.
Accounts receivable financing allows suppliers to get paid earlier on their international sales. For a small fee, they can receive up to 100% of the invoice value once goods are shipped.
The A/R financing process can be summed up in five simple steps.
Internal Credit Analysis
Before making a deal, the financing company needs to establish terms. The two most important figures are the buyer credit limit and the supplier discount rate.
The buyer credit limit helps the financing company determine buyer risk. They need to know how likely it is the company will pay its obligation when due.
The supplier discount rate is the cost to the supplier for A/R financing services. By paying this fee, the supplier can get paid at shipment and transfer all transaction risk to the financing company.
For example, if the buyer credit limit indicates a higher-risk transaction, the financing company will charge a higher fee to the supplier. Despite this fee, the supplier gets a swift influx of cash and the piece-of-mind that comes with removing the risk of buyer non-payment.
After the first step, the rest of the accounts receivable financing process is straight forward. The supplier provides payment instructions promising an invoice on open payment terms. The buyer must confirm that the goods they’re purchasing are accurate and that they are satisfied with payment terms.
Shipment of Goods
The third step is business-as-usual. The supplier ships or delivers the approved goods to the approved buyer.
Payment to Supplier
In conjunction with the third step, the supplier is paid immediately by its A/R financing company. The company purchases the invoice from the supplier less a small discount.
On the agreed upon due date, the buyer pays the financing company – not the supplier – the face value of the invoice.
Suppliers facing cash flow shortages from unpaid invoices should consider A/R financing. In addition to working capital, they’ll have access to a number of benefits.
Funds are useless when tied up in receivables. Lack of cashflow can force suppliers to halt operations. Accounts receivable financing offers a way out.
A/R financing is all about optimizing the supply chain; and thus, optimizing the entire business. With access to cash up front, the supplier can finance more orders, maintain growth and capture more revenue.
Such increased liquidity helps businesses overcome short term financial challenges. In a world of strict bank regulations, credit access is often tight for suppliers – and traditional lenders are unwilling to offer help. By rejuvenating cash flow, A/R financing helps suppliers stay afloat in the short run and prosperous in the long run.
Suppliers (especially those in developing countries) shoulder immense risk when they offer open account terms to buyers (larger companies in developed countries) on their own. This arrangement leaves suppliers sitting at the shipping dock with zero cash and zero guarantee they will ever receive payment.
But with accounts receivable financing, suppliers can transfer to the financing company the default risk associated with the invoice. This makes everyone happy. Suppliers like getting paid up front and removing risk. Buyers like open account terms.
One thing to note: some financing companies only offer recourse financing. This means risk is still the burden of the supplier. If you don’t want the risk, work with an A/R financing provider that invoices on a non-recourse basis.
Most buyers want open account terms. This is because it maximizes cashflow. But open account terms create problems for suppliers who don’t have the power to negotiate, but also can’t afford to lose a deal.
Accounts receivable financing gives suppliers the best of both worlds. Open account terms without hurting the future of their business.
This helps suppliers safely increase sales. They win more business from buyers, but remove the risks of working with so many.
Although it depends on the deal, most A/R financing is not counted as debt. This means supplier balance sheets don’t suffer from excessive debt. So, any existing (or future) financing arrangements through loans or lines of credit are not affected.
Also, suppliers using A/R financing don’t have to deal with the pain of a secured bank loan. Since A/R financing is a type of unsecured option, it does not require collateral.
Other financing options require businesses to surrender ownership stake in exchange for funds. A/R financing does not require this. After shipment of goods, suppliers have no obligation to the deal beyond their discount fee.
Suppliers can pick and choose which receivables to sell to a financing company. This helps them strategically trade-off cashflow gains and funding costs.
It also levels the playing field with buyers, helping build a trustworthy and reliable relationship both parties can leverage.
Accounts receivable financing offers suppliers greater leverage, flexibility and growth potential. As the field gets more competitive, export businesses will need even more working capital to survive. Companies that fail to explore the range of available A/R financing options are essentially giving up on their future. Don’t be that company.
Stenn gives suppliers the working capital they need to finance production, maintain growth and attract buyers with open payment terms. Contact us today.