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Why use receivables financing in your business?

Data from , 7-minute read. By: Skyone
In Brazil, companies seek to increase their sales by offering their customers convenient payment methods, which can include installment payments, promissory notes, checks, or payment booklets. With these payment options, the possibility arises for the company to anticipate receivables. Have you ever heard of this term? Do you know how to make this financial move? And when is it worthwhile to make this choice? To clear up any doubts and explain what receivables financing is, we've prepared comprehensive content on the subject with everything you need to know to identify right now if it's the right time and what options are available. Check it out!

What is receivables financing?

Receivables financing occurs when a company has a series of amounts to receive in the future, mainly from installment sales via credit card, post-dated checks, and promissory notes, and requests this money in advance to increase the liquidity of its cash flow and promote good financial health for the company. Using the example of a food distributor, it's common for sales to be made in installments, with payments arriving only months later. With receivables financing, the company can have this money sooner than planned to cover more urgent expenses, avoiding the accumulation of debt that would lead to high interest rates.  As the name suggests, it is the action of bringing into the company's cash flow amounts that would only be paid in the future. It is the transformation of sales on credit into cash on hand. Based on the amount of revenue a business receives monthly, the business owner can anticipate future receipts and obtain advances on those receipts as a form of financing, to invest or pay other debts and expenses, all based on the projected value. Overall, receiving these funds in advance is a way for companies to adjust their expenses and investments during periods of potential cash flow shortages. The business owner can use this source of financing to inject money back into the company for future projects or expansion.

Should I get a receivables financing option or a loan?

As we have seen, receivables financing may seem similar to a loan, with the difference that in this case the company would already have access to these funds. In a loan, the company borrows an amount that will later be repaid with interest.  But for businesses to obtain the necessary funds, it's easier to resort to receivables financing than bank loans. Banks, traditionally more conservative, are less likely to approve a loan, with several bureaucratic steps in the process hindering access to these funds. Basically, each of these payment distribution solutions will have advantages and disadvantages. The most important thing initially is to understand the fee charged for each transaction. When considering receivables financing, there are two main types of sales that can influence the rate charged, allowing you to make the right choice:
  • Short-term installment loan;
  • Long-term installment loan.
For each of these options, the contracted company may charge a different fee, and generally, the longer the payment term, with several months still to go before the funds are available, the higher the amount you will have to pay to obtain them in advance.

How do I get an advance on receivables?

We've already understood how receivables financing works and what the differences are between this option and a loan. But how do we do it in practice? In order to obtain an advance, two steps must be taken first: determining the financial health of the company and choosing services that offer this advance option.

1. Analyze your financial health to determine the amount you need to advance

In this first step, it's necessary to have a comprehensive overview of all your projected income to determine the exact amount you actually need to advance It can be difficult to draw quick conclusions, which is why organizing all your payment forecasts in one place is a necessary action, where you can see the total amount of payments to be received each month, as well as a month-by-month record of these entries. With this information in hand, you already have a very good overview of what you should receive and can make comparisons with your bills to pay or amounts that are usually spent every month to see if you will need the advance. Many companies use an ERP (Enterprise Resource Planning) system to manage this.

2. Learn about the services available for advance payments

Since installment sales via credit card, promissory notes, checks, or payment booklets represent the largest volume of sales on credit for companies, there is the possibility of anticipating receivables by contacting the operators directly. The catch is that they usually have very different rates from one another, so it's worth doing thorough research beforehand. Some credit fintechs are also innovating in this market, using technology to advance receivables. But now it's the techfins, which, being less bureaucratic, offer more chances of getting the funds into the account in less time. But a good alternative is to look for solutions that connect to your management software, creating a simpler layer of financial services that is directly connected to your transaction records

When should you consider an advance on receivables?

When does a business owner need to decide whether to anticipate payments expected in the coming months? We can say there are 3 main moments to make this choice:

When the cash flow forecast shows a positive scenario

Before considering an advance payment, the business owner needs to carefully observe the consistency of the receipts they are receiving each month. Having this cash flow forecast is fundamental to knowing exactly what needs to be advanced and what can continue to wait to receive in the future.

When there is an investment opportunity that will boost sales

If your planning has already made it clear that anticipating receivables at this time will help you invest in actions that will help increase your sales, and consequently increase the company's cash flow, now is one of the times to make that choice.

When the interest rates on early repayment are very low

It is very tempting for a company to take advantage of this type of opportunity after verifying that the interest rates charged for early repayment are very low compared to other times and other types of loans. This may be the best chance to settle debts and outstanding financial obligations. Now that you know all about receivables financing, keep following our blog to stay updated on news and tips about this topic! Follow us on social media: LinkedIn | Instagram
Skyone
Written by Skyone

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