The term accounts receivable financing denotes the practice of selling accounts receivable to a third-party service provider. This term is synonymous with the term factoring.
In accounts receivable financing, invoices and other accounts receivable are sold to third-party service providers known as factors at discounted rates in order to raise immediate cash. The third party service provider then collects the accounts receivable at their full face value.
Accounts receivable financing provides companies with a means of stabilizing their cash flows and avoiding the risk of invoices being paid late or going unpaid.
Many Swiss banks either offer factoring services themselves or maintain partnerships with specialized factors.
Example of accounts receivable financing:
A small confectionary manufacturer enters into a contract with a retailer to deliver 10 tons of premium chocolate to its supermarkets every month. As per their contract, the retailer owes the manufacturer 1500 Swiss francs per ton of chocolate, or 15,000 francs in total per month.
The problem is that the chocolate maker needs the 15,000 francs at the end of each month in order to buy new raw materials and pay its staff. Unfortunately, it has no guarantee that the retailer will settle its invoices at the end of every month. There is a significant risk that the retailer will put of payments over several months. There is also a risk that the retailer may go bankrupt before its invoices are settled, leaving the chocolate maker with a major deficit that could drive it to bankruptcy as well.
In order to avoid these risks, the chocolate maker sells the account receivable – the right to invoice the retailer for 15,000 francs worth of chocolate every month – to a factor. The factor signs a contract promising to pay the chocolate maker 14,000 francs at the end of every month. The 1000-franc difference between the amount fronted by the factor and the account receivable is the factors commission for taking on the work of invoicing the customer and the risk of late or failed payments by the retailer.
The chocolate maker receives a guaranteed income of 14,000 francs at the end of every month – on time to pay its employees and buy raw materials. The factor which fronts this money makes a return of around 6.6% when the retailer settles its 15,000-franc-per-month debt.
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