There are many different scenarios of running a business in which you might find yourself having cash flow problems. While it may have been a money management mistake made by those in leadership positions, it could also have been something completely out of your control, such as economic distress, a slow season, or the need to grow rapidly before your revenue streams have a chance to catch up. At The Commercial Finance Group in Atlanta, we’re dedicated to helping companies across the Southeast overcome these issues to facilitate success. We accomplish this through our full offering of customized solutions, including receivables financing. Keep reading to learn more about receivables financing and an augmentation called “securitization” that’s beneficial for certain organizations. Questions? Please don’t hesitate to contact us!
Receivables Financing Lets You Cash In On Invoices
If you’re fairly new to the world of financing options outside the typical, collateral-backed loans offered by the bank, you may not have a strong knowledge of how receivables financing works, so allow us to catch you up.
Accounts receivable financing makes it possible for companies to convert money that it’s owed (in the form of unpaid invoices) into cash. This is accomplished by selling the invoices to a third party (commonly known as a factor) who is then responsible for collecting the debts. The invoices are sold at a slight discount, so the factor has an opportunity to make a profit for its trouble. This is typically a good arrangement for businesses who would rather have some money quickly rather than no money for an indeterminate amount of time.
What’s The Purpose Of Accounts Receivable Securitization?
In some cases, it may be possible for an organization to immediately convert accounts receivable into cash through the securitization process. This is different than traditional receivables financing and is only applicable to certain types of companies. More about that later.
The purpose of accounts receivable financing is to provide cash immediately instead of waiting for customers to pay on their own schedule. Securitization of accounts receivable also allows companies to insulate themselves from the risk of non-payment.
“Securitization offers one other benefit: Even though a company must surrender some of the value of its receivables when it securitizes them, selling off the receivables in this manner is typically cheaper for a company than taking out a loan backed by the cash flow from the same receivables,” explains the Houston Chronicle.
How Does Securitization Work?
There are five general steps associated with this process. There may be more steps involved depending on the financial circumstances of a particular company.
- A special purpose entity (SPE) is formed by the company seeking securitization
- Selected accounts receivable into the SPE
- The SPE sells the receivables to a bank conduit
- The bank conduit pools the company’s receivables with those from other companies, and issues a commercial paper backed by the receivables to investors
- Investors are paid back based on cash receipts from the accounts receivable
Steps adapted from accountingtools.com
Why Accounts Receivable Securitization Might Not Be Right For You
As we mentioned in a previous section of this article, accounts receivable securitization isn’t a financing option that’s open to all businesses. Although it seems like a fairly simple process, it’s one that can only be utilized by larger companies. The process for setting up an SPE and the steps that follow is fairly complex, and generally requires more time and resources than a small or mid-sized business has to offer. So what’s a company without millions in receivables to do?
Expand Your Future With Receivables Financing From CFG!
The Commercial Financial Group specializes in providing receivables financing options to small and mid-sized businesses. While this process might not offer the same assurances as accounts receivable securitization, it can be a very attractive option for companies looking to solve cash flow problems or fund rapid growth. We’ve helped many different types of businesses across the Southeast, and we’d be honored to help you as well! If you’ve been told that you’re not eligible for traditional bank financing for one reason or another, please contact us. We’d be happy to review your situation and find a custom lending solution that’s right for you.
