Receivables Discounting

Definition

Receivables Discounting is a form of Receivables Purchase in which sellers of goods and services that are part of Physical Supply Chain sell individual or multiple receivables (represented by outstanding invoices) to a finance provider at a discount.

Also denoted as Receivables Finance, Receivables Purchase, Invoice Discounting, Early Payment of Receivables.

Business Model Description

Discounted receivables range from a single receivable through to the majority of the receivables within the sales ledger of a seller. The funds available to the seller are based on the outstanding value of the invoices related to the relevant buyers.

Value Proposition

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

• Potentially allows the seller to provide extended credit terms to its buyer (improve competitiveness)
• Working Capital optimisation (better utilization of financial resources)
• Growth in business on ‘open account’ terms
• Finance and liquidity availability to mitigate limited credit availability from traditional banking sources
• Potential for balance sheet management via ‘true sale’ of the receivables under the relevant legal structures
• Possible improved balance sheet management as the sale of receivables generates off balance sheet liquidity without creating additional leverage or use of credit facilities (as would be the case with a traditional loan facility).
• Credit risk coverage in non-recourse Receivables Discounting as the finance provider will be responsible for normally 100% of any losses arising from the credit covered receivables if the buyer defaults
• Reduction of the Concentration Risk by distributing risk to a finance provider
• Better utilisation of the seller’s financial and operational resources if the sale of the receivable is disclosed and collection is handled by the finance provider
• Confidentiality of the source of finance from the buyer in the case of an un-disclosed contractual relationship between the seller and the finance provider

Customer Segments

Receivables Discounting is usually offered by finance providers to

• Large Corporates or institutional clients selling to multiple buyers. The buyer coverage will depend on the number of buyers for which the finance provider is willing to take Credit Risk.
• SME Lending

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

The finance provider offers finance based on a security margin applied to the open account receivables being assigned by the seller and as pre-agreed between the seller and the finance provider.

A Receivables Purchase Agreement (RPA) is executed between the seller and the finance provider. A certified copy of the invoice(s) or the invoice data set is made available to the finance provider. Under the agreement, the seller provides the finance provider with an assignment of rights to the receivables(s) being financed, according to the jurisdiction in question. Depending on the terms of the underlying Receivables Purchase Agreement, a notice of assignment may be provided to the buyer. Any additional required procedure according to the respective jurisdiction is suitably documented.

Generally speaking, Receivables Discounting is structured as a ‘true sale’ and the rights and title to the receivables are transferred to the finance provider by means of an assignment of rights (or transfer of title), or by filing or registering a security interest granting the same rights as an assignment, all executed according to the relevant jurisdictional requirements.

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

• Default Event or Insolvency of the buyer, mitigated by Credit Risk Analysis, Credit Risk Monitoring and potentially Credit Insurance
• The existence of valid and eligible receivables being discounted, mitigated by a regime of sampling or individual verification
• Country Risk or Political Risk, mitigated by Due Diligence and Political Risk Insurance. Special circumstances relating to Sovereign Risk may apply to receivables due from governments or government agencies
• Loss Given Default Risk arising from the removal of recourse to the seller in the event of non-recourse or limited recourse transactions, mitigated by the buyer’s ability to pay
• Receivables dilutions (Dilution Risk) (e.g. credit notes, offsets against invoices due for payment), mitigated by the security margin and advance ratio
• Business Execution risk in case of
  • Lack of legal authority, mitigated by legal due diligence on the respective jurisdiction and the involved contractual parties
  • Pre-existing security arrangements or bans on assignments, mitigated by waivers given by other secured parties or their removal or by taking additional security and completing the required perfection requirements
  • Potential issues with the assignment of receivables due to various underlying governing laws in place and the resultant enforceability of the transaction, in both domestic and cross-border situations mitigated by legal due diligence.
  • Prohibited and restrictive categories of goods
• Legal Risk from KYC/AML issues (to be handled during the on-boarding procedures and subsequently in periodic reviews)
• Fraud Risk by
  • the seller, for example by inflating the value of invoices or offering invoices without an underlying commercial transaction, mitigated by verification of the transaction and deploying adequate credit controls
• Internal Fraud Risk by collusion between the seller and an employee of the finance provider, mitigated by Internal Controls and Segregation of Duties
• General Operational Risk resulting from multiple operational requirements to perfect title to the receivables and undertake ongoing administration, mitigated by sound procedures, appropriate levels of automation and process controls

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