Financing account receivables
What is accounts receivable finance
Accounts receivable financing is “a type of asset-financing arrangement in which a company uses its receivables -otherwise known as trade debtors, or outstanding invoices – as collateral in a financing agreement. The company receives an amount that is equal to a reduced value of the receivables pledged.”
This type of financing enables business to release capital tied up in accounts receivables. Financing accounts receivables facilitates the transfer of default risk associated with possessing accounts receivables to the financing company; this can allow a company to shift focus from chasing payment onto activities to fuel business growth.
Prevalence of receivables finance in the UK
The UK has the highest penetration of factoring or invoice discounting in the world, at c. 10% of GDP, vs. the United States with 1% of GDP. This puts the UK in the lead for factoring. This may perhaps be due to Britain’s role as international entrepot and colonial trading power leading to a historical familiarity with factoring, and it may also be to a variety of legal factors and preponderance of alternatives in other countries. France, and other European countries, suffer from excessive regulation with regards receivables financing, limiting the growth and development of the industry. Hence, with high GDP penetration in the UK, a receivables exchange may or may not be marketable.
MarketInvoice: a receivables marketplace
The concept of a receivables exchange – an online marketplace where invoices are bought and sold – has come to the UK in the form of Marketinvoice. Receivables are bought and sold on an online exchange in real time. The first receivables exchange in the UK is Marketinvoice, which began in April 2010. The advantages of such a receivables exchange are manifold. However, rather than cannibalising the existing invoice finance market, the exchange model allows for new aspects of pricing to occur. Invoices that perhaps previously were disallowed by factors are allowed, increasing funding, allowing businesses to grow and new transactions to occur.