Receivable finance at a glance
Receivable finance at a glance
Receivables finance (also called receivables financing) is a broad category of financing solutions that are based on, or secured by, accounts receivable. It includes products such as factoring and invoice discounting (and, more broadly, supply chain finance solutions - though many practitioners separate seller-led receivables finance like factoring and invoice discounting from buyer-led payables finance like supply chain finance or reverse factoring), and allows businesses to receive immediate funding against the value of their outstanding invoices.
Cash flow is the lifeblood of any business. Receivables finance, therefore, is a particularly useful financing tool as it frees up cash that is otherwise trapped in a business’s accounts receivables. The business can then use this cash within the business to pay bills or to invest in its growth and innovation.
Key Benefits
- Improves cash flow
- Increase liquidity
- Reduce reliance on long-term invoices
- Allow companies to access credit facilities for expansion
•Market Statistics
Global Factoring Volume
4 trillion
Account Receivable Financing Market CAGR
expected to be 11.30% from 2026-2035
Default rate
0.02%
Global trade finance gap
USD 2.5 trillion
85% of SME working capital and 94% of small firms’ fixed assets are self-funded, limiting growth.
How receivables finance works
When companies sell products or services to their customers, the common practice is that they extend credit by allowing the customer to make payment at a later date. Typically, this will be 30, 60, or 90 days, but can be any length of time that the two parties agree to in the contract (subject to some regulatory restrictions in different regions).
While this is great for many customers, as they are able to receive goods or services to perform their operations without needing to pay upfront, it can pose challenges for the business offering these payment terms.
Receivables finance allows businesses to access cash trapped in accounts receivable by selling or borrowing against these unpaid invoices. Generally, third parties will pay somewhere between 70%-90% of the total invoice value to the sellers. This third party then earns a return through fees, interest, and, in some structures, by collecting the full invoice amount when it falls due. While there are many different nuanced versions of this, this is the main idea of receivables finance.
•Process Flow
Seller sells goods to buyer
Seller issues an invoice to the buyer
Seller sells or assigns the outstanding invoice to the funder
Funder pays seller a cash advance of 70%-90% of the value of the outstanding invoice
Buyer pays the invoice (either to the funder or to the seller, depending on the structure)
Funder sends the balance to the seller minus fees and charges
Common Use Cases & Applications
1
Working capital and cash flow management:
Businesses can use receivables finance to access immediate cash from unpaid invoices by receiving early payments from third parties before payment is due from their customers. Gaining access to this additional cash can help them to:
Cover operating expenses
Cover payroll
Invest in growth
2
Invoice monetisation (factoring and invoice financing)
Companies can use factoring and invoice financing to convert outstanding invoices into cash either by borrowing against them (invoice financing) or selling them to a third party (factoring). In either case, the business frees up liquidity that can be used for their business needs. These solutions are particularly useful for businesses with long payment terms.
3
Credit risk and collections management
In some factoring arrangements, the funder takes over responsibility for collecting payment from the buyer once the invoice is due. This allows the business to focus on core operations rather than managing receivables and chasing payments.
Under certain structures (particularly non-recourse factoring) the funder will assume part or all of the credit risk associated with the buyer, meaning that if the buyer fails to pay due to insolvency or other agreed events, the funder may absorb the loss (subject to the terms of the agreement).
These services are especially valuable for companies dealing with a large number of buyers or operating in markets where credit risk is more difficult to assess.
4
SME liquidity support
Many SMEs will use receivables finance as a means of improving their cash flow, particularly when access to traditional bank lending is limited or constrained. Unlike conventional loans, which base the available financing on metrics like the company’s balance sheet and credit history, receivables finance uses the strength of the business’s invoices and, by extension, its customers. This makes it a much more accessible form of funding for smaller firms that may not have a large number of assets.
By unlocking cash tied up in unpaid invoices, SMEs can meet day-to-day expenses, take on new orders, and manage periods of uneven cash flow without taking on additional unsecured debt.
In many cases, receivables finance also scales with the business. As sales increase and invoice volumes grow, the amount of available funding can increase as well.
There are certain legal rules and industry standards that guide how receivables finance transactions can be structured. Let’s take a look at some of these frameworks.
1
Commercial law and assignment of receivables
Each country will have its own set of national laws that determine whether and how receivables can be legally transferred. These legal frameworks underpin the validity and enforceability of receivables finance structures. While it is not feasible to go into details about all of the different national laws here, it is important to remember that these exist and may differ from country to country.
2
Basel framework
The Basel III framework and its subsequent reforms set out capital and risk management requirements for banks. These include exposure requirements related to receivables finance such as factoring and asset-based lending. These rules assess credit risk, counterparty risk, and capital allocation.
3
Uniform rules and industry guidelines
Industry bodies such as the FCI and the International Trade and Forfaiting Association (ITFA) provide standardised rules, guidelines, and best practices that support cross-border receivables finance activities. For example, ITFA publishes guidelines and standard documents for forfaiting transactions. These help banks and finance providers in different countries follow a common approach when buying receivables.
4
UNCITRAL Model Law on the Assignment of Receivables in International Trade (2001)
Developed by the United Nations Commission on International Trade Law, this model law provides a framework to help countries modernise their legal systems for receivables transfers. It addresses issues such as debtor notification and priority of claims, improving legal certainty and supporting cross-border financing. While, as a model law, it is not automatically binding, several countries have used it as a reference when updating their own national laws. This has helped create more consistent legal treatment of receivables across different jurisdictions.
5
PEPPOL
PEPPOL (Pan-European Public Procurement Online) is a network that allows businesses and public sector organisations to send electronic invoices and documents in a standardised format. Instead of each company using a different system, PEPPOL creates a common “language” so invoices can be exchanged easily and securely across borders.
FAQs
What is receivables financing?
Receivables financing is a funding method where businesses receive early payment on unpaid invoices by either selling them to a third party or borrowing against them.
Is receivables financing different from a loan?
Yes. Traditional loans are typically based on a company’s overall credit profile. Receivables financing is specifically linked to invoices and is secured by, or based on, those receivables. This can make it more flexible for businesses with strong sales but limited access to traditional credit.
What is the difference between invoice financing and factoring?
Invoice financing involves borrowing against unpaid invoices, while factoring involves selling those invoices to a third party. In factoring, the funder will generally then be the one who is responsible for managing collections.
Who typically uses receivables financing?
Receivables financing is commonly used by small and medium-sized enterprises (SMEs) and businesses that face cash flow gaps due to long payment terms. This is because it provides with a source of funding that is based on the strength of their receivables, rather than on their overall credit profile, which is often weaker for smaller businesses and, as a result, harms their ability to secure traditional financing.
Are there any costs associated with receivables financing?
Yes, as with any form of financing, there will be costs involved. These typically include service fees and interest charges, which vary depending on the risk profile of the business and its customers, as well as the structure of the financing.
For example, a business may receive 85% of an invoice value upfront. The finance provider may then charge a service fee for managing the facility, along with an interest charge for the period until the invoice is paid.
The total cost will depend on factors such as the credit quality of the buyer, the length of the payment term, and the volume of invoices financed.
What happens if a customer does not pay the invoice?
This depends on the structure. In recourse arrangements, the business retains the risk and may need to repay the funder. In non-recourse arrangements, the funder may assume the credit risk, subject to agreed conditions.
Is receivables financing suitable for international trade?
Yes, receivables finance is widely used in international trade as it helps businesses manage many of the challenges that often come with trading across borders (such the longer payment terms, currency differences, and higher risks).