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• 12 Aug

  Purchase Of Receivables

  

  Purchase of receivables is a term that can sometimes be used to refer to receivables finance. Strictly speaking "purchase of receivables" just means buying a parties book debts (which are its outstanding sales invoices).

  Unpaid sales invoices are debts owed by your customers (also called debtors) which are sometimes called "receivables". However, when the term "purchase of receivables" is used, it almost certainly refers to a discounter providing finance against these unpaid debts.

  Prepayments & Discounting

  A discounter provides prepayments against outstanding invoices, this prepayment is for a large proportion of their value e.g. 85-95% of the total value. So you effectively get a cash advance against your invoice, before it has been paid. When the invoice is paid by your customer, you receive the balance of the invoice value - less the discounters fees. This accelerates your cash flow.

  The discounter will normally take an "assignment" of your invoice, so that they can take ownership of the debt. They may also take a legal charge over the book debts of your company (a charge is a legal instrument registered at Companies House), which is another way of taking those invoices as part of their security for the finance.

  Purchase Of Receivables

  However, not all facilities work in this way. In some cases, the discounter will purchase your invoices outright at 100% of their value, less the discounters fees. This is what really should be called "purchase of receivables", however the term is also used to refer to the prepayment approach explained above.

  This approach of funding 100% of the value of receivables is common in some sectors, such as car crash repairs where garages often bill insurance companies in respect of car crash repairs, which are pre-approved by the insurer. However, the funding of other sectors does not work in the same way. The level of prepayments tends to vary by sector. For example in construction, where it is typical to see contractual debts and stage payment issues, the prepayment may be 70%. Other sectors with a very clean audit trail e.g. recruitment of temporary labour, can see prepayments as high as 95%.

  By Glenn Blackman