The six most common myths about Receivables Finance

It is easy to forget that Receivables Finance is almost 4,000 years old. Created by Mesopotamians in the 17th century BC, merchants would borrow barley from ‘barley bankers’ in order to trade for goods brought in by foreign traders on ships. The barley would then be paid back later with accrued interest to the banker.

Of course, Receivables Finance has become more complex and the transactions have become much larger since the moment Mesopotamians realised that they could lend barley to each other to facilitate trade, but the basic premise has remained the same: A funder provides up-front currency to a buyer in order to facilitate an exchange of goods and services with a seller.

However, persisting almost as long as Receivables Finance itself are the myths that surround it. Despite its long history in countless societies, Receivables Finance has historically been a relatively poorly understood product, even by many with excellent knowledge and understanding of the financial services industry.

This article will highlight six of the most common myths surrounding Receivables Finance.

Myth 1 – Companies lose control of their customer relationships in Receivables Finance facilities

Relationships are arguably the most important aspect of any business, and many companies worry that a Receivables Finance programme will have a negative impact on these relationships with their customers. Generally, your company can continue to collect from its customers in the normal course of business, although a control agreement will often be required by funders over the collection account.

Myth 2 – Receivables Finance facilities are always disclosed to customers

For mid-market companies, funders generally allow for ‘undisclosed’ sale of receivables, meaning your end customer will not be contacted or notified at all.

Myth 3 – Receivables Finance is expensive

Given the facilities are asset-backed, they tend to be cheaper than bank debt pricing on revolving credit facilities. Additionally, because of the prevalence of Factoring and Receivables Financing in Europe, TRF funders are much more sophisticated in accessing funds for the asset class which therefore decreases their funding costs. European financiers are thus able to provide pricing, typically at L + 300-500, which is favourable relative to their North American counterparts, and some of these funders are actively seeking to build assets in North America.

Myth 4 – Receivables Finance facilities are cumbersome and require significant investment in IT and systems

Setting up a Receivables Finance programme does not require installation of complex IT systems. With some upfront work to set up transaction reporting, data is typically extracted from your ERP, increasing transparency for funders and enables a higher advance rate.

Myth 5 – Receivables Finance is for companies with cash flow problems

Funders of Receivables Finance programmes are not interested in being a crutch for failing companies to lean on. In contrast, Receivables Finance is used by many large and successful corporations and any company can use this form of financing to decrease its borrowing, fund growth, improve its liquidity and working capital metrics.

Myth 6 – Banks are the only and cheapest source of Receivables Finance

We have moved on from the era where banks were the only source of Receivables Finance. In recent years, and especially even more so when banks retreated during the pandemic, many specialized private credit institutions have stepped up to support the needs of corporate clients. Demica is well placed to connect you with the right funders based on your objectives and asset profile, bank or non-bank.

Looking beyond the myths

With a market size of more than $3,000 billion, more and more companies have been able to see past the misconceptions around Receivables Finance, and it is quickly becoming an essential tool in the corporate armoury. As the financial world opens its arms to Receivables Finance, it seems that the Mesopotamians were perhaps onto something all those years ago.

If you’re interested in selling your receivables for cash, the Demica team would be delighted to help you find a solution. Fill out our form to speak to an expert.