Loan or Advance against Receivables

Definition

Loan or Advance against Receivables is a form of Loan or Advance based Supply Chain Finance in which financing is made available to a party involved in a Physical Supply Chain on the expectation of repayment from funds generated from current or future trade receivables and is usually made against the security of such receivables, but may be unsecured.

Also denoted as Receivables Lending, Receivables Finance, Invoice Financing, Trade Receivable Loans, Trade Loans.

Business Model Description

In this business model the loans or advances may be legally secured on a stream of future receivables or may be unsecured and simply take comfort that such receivables will be converted to cash at a future date to repay the financing. Such loans are only made where the seller (the borrower) has, or will acquire through use of the loan monies, receivables arising from its business activities as a seller of goods or services.

Where the relevant receivables exist at the time the loan is made, such a loan may be considered as a type of secured loan collateralised by the receivables.

Where the loan is advanced on a promise or expectation of such receivables arising at a future date, the loan is akin to working capital finance with the comfort of potential future collateral.

Value Proposition

Clients (the sellers into the supply chain) receive the following benefits:

• Enables access to financing on potentially better terms than without the use of receivables
• For the finance provider, security of the receivables, where taken.

Customer Segments

The finance provider and the client, a seller of goods and services.

Distribution Channels

Distribution Channels are the means by which a company communicates with and reaches its Customer Segments to deliver its Value Proposition.

Customer Relationships

The parties to the financing are the seller and the finance provider.

Whilst buyers are not a party to the agreement, they are relied on for payment of the underlying receivables or invoices and may also be required to validate that specific invoices are genuine and in certain circumstances may confirm that invoices are approved for payment within a specified timeframe.

Revenue Streams

• Fees
• Security Margin

Key Resources

• Personnel
• IT Systems

Key Activities

Client submits loan drawdown request with any agreed documents (e.g. Purchase Order)

The loan agreement will be issued in accordance with the finance provider’s usual procedures and the appropriate security as applicable perfected in the usual manner.

Finance provider provides finance and funds the seller

Monitoring of the receivables may or may not be undertaken.

Seller repays finance provider at maturity and settles the loan using funds received from buyers. In some cases the finance provider may receive funds directly from bueyrs or debit the seller's account held with it

In some instances, the finance provider may establish a Borrowing Base to regulate the amount of funding advanced

Risk Management

The risk management section focuses on the risks that must be managed by the business model. The risks to the business model itself can be identified with the Business Model Risk identification framework

• Creditworthiness of the client especially where no formal security is taken over the receivables, mitigated by due diligence
• Performance Risk on the seller (client) which may lead to failure to create receivables, mitigated by due diligence
• Bans on Assignment, mitigated by due diligence and representations and warranties.
• Dilution Risk, mitigated by due diligence and presentations and warranties from the seller (client)
• Timeliness of creation of the receivables, mitigated by Due Diligence
• Failure to create or perfect effective security, mitigated by legal due diligence
• All the above risks are also mitigated by a robust monitoring, reporting and audit process regarding transactions, systems and controls
• Risk distibution through Syndication and Sub-Participation.

Key Partnerships

Partnerships is the network of suppliers and partners that help make the business model work:

• Platform providers (B2B networks, e-invoicing solutions, software vendors)
• Bank or Non-Bank Funders providing funding for SCF programmes
• Credit Insurers
• Other risk management partners (FX/IR hedging)

Cost Structure

• Personnel Salaries
• Infrastructure Costs

Competitors

• Alternative Supply Chain Providers
• Alternative Forms of Financing