Accounts Receivable financing (A/R financing for short) enables companies to receive early payment for their invoices. Receiving early payment for invoices helps with cash flow and gives Suppliers access to working capital that would otherwise be tied up.
Suppliers must often give open account terms (also called deferred payment terms) to attract international Buyers. These terms allow Buyers to pay for goods after they are shipped and delivered, meaning that several months can pass before a Supplier is paid for goods it has already sent.
A/R financing allows a Supplier to receive advance payment from a third-party financier while its Buyer still benefits from open account terms.
The Supplier ships goods and submits an invoice to the Buyer, with a due date of anywhere from 30 to 120 days.
An accounts receivable financier will then advance a percentage of the invoice value to the Supplier. The Buyer then pays the full invoice amount to the financier on the due date. The financier then sends the Supplier the balance of the invoice amount, minus any service fees.
NB: If the Buyer does not pay, either the Supplier or the finance company is responsible for chasing the Buyer. This is explained in more detail below.
Suppliers can face problems if they are suffering from cash flow shortages associated with deferred payment terms.
With upfront cash from A/R financing, Suppliers can finance more orders, manage manufacturing or logistics costs, pay staff and maintain growth. This increased liquidity helps Suppliers to overcome short-term financial challenges.
Suppliers, particularly those in emerging markets, face higher risks when offering deferred payment terms to larger Buyers, especially if those Buyers are unknown to the Supplier. What happens if Buyers don’t pay when the invoice falls due? How will Suppliers cope with the loss?
With non-recourse A/R financing, the financier assumes all risks associated with the invoice if the Buyer does not pay. This provides peace of mind to the Supplier and avoids the need to chase Buyers for payment.
Please note that some A/R financing companies will offer only recourse financing, meaning that the risk of non-payment is still the Supplier's responsibility. It’s crucial to consider whether your chosen financing company provides recourse or non-recourse financing.
Most Buyers prefer having open account terms for international trade deals as it maximises their cash flows. However, this puts many Suppliers at a disadvantage because they can’t access the working capital tied up in those invoices. This means they often have to refuse the open account terms that Buyers request, meaning that they lose trade deals.
Accounts receivable finance bridges this financial gap, allowing Suppliers to offer open account terms to more Buyers without worrying about it causing short-term cash flow challenges to themselves.
A/R financing does not subject any party to long-term repayment agreements. Once the invoice has been settled, the matter is considered closed.
This makes A/R financing services more attractive than a bank loan to Suppliers because loans can subject them to months or years of gradual payments.
A/R financing is a type of unsecured financing, meaning it does not require collateral.
Some finance agreements, such as bank loans or letters of credit, are secured against collateral. This means that companies could surrender ownership of assets (physical or financial) should the invoice not be paid. A/R financing does not require additional collateral because cash advances are secured against the invoices themselves. Suppliers are actually taking advances on money they are already owed.
Accounts receivable financing provides Suppliers with more flexibility and potential for growth.
Suppliers can decide which invoices to submit to an A/R finance company for financing. This helps them to prioritise those invoices that will be most beneficial to their cash flow.
With A/R financing, companies can boost turnover without waiting months for invoices to be paid. The money is received more quickly, allowing Suppliers to begin new trade cycles with unfrozen capital.
Strict regulations are causing banks to be more cautious about lending, meaning credit access is increasingly difficult for Suppliers to obtain. Flexible A/R financing offers a convenient, fast solution that benefits many Suppliers engaged in trade.
If you are interested in learning more about the content listed above, Stenn has a dedicated FAQ section where you can find more information about our invoice financing services. We also provide videos which explain the company and the financing process in detail.
About the Authors
This article is authored by the Stenn research team and is part of our educational series.
Stenn is the largest and fastest-growing online platform for financing small and medium-sized businesses engaged in international trade. It is based in London, provides financing services in 74 countries and is backed by financial giants like HSBC, Barclays, Natixis and many others.
Stenn provides liquid cash to SMEs within the global financial system. On stenn.com you can apply online for financing and trade credit protection from $10 000 to $10 million (USD). Only two documents are required. No collateral is needed and funds are transferred within 48 hours of approval.
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