Discounted receivables range from a single receivable through to the majority of the receivables within the sales ledger of a seller. The funds available to the seller are based on the outstanding value of the invoices related to the relevant buyers.

Receivables Discounting is usually offered by finance providers to larger corporate clients selling to multiple buyers. The buyer coverage will depend on the number of buyers for which the finance provider is willing to take credit risk.

The finance provider offers finance based on a security margin applied to the open account receivables being assigned by the seller and as pre-agreed between the seller and the finance provider.
Typically, the finance provider will limit such offering to a client base, whose receivables comply with certain criteria, such as a minimum credit rating and will offer various typical features as follows:

• The financing can be provided on a ‘without recourse’ basis to the seller, although there are many situations where recourse or limited recourse is maintained. The act of discounting does not by itself connote whether a transaction is ‘with’ or ‘without’ recourse
• In general, if Receivable Discounting is executed without recourse to the seller, the expectation of the seller is that the receivable is removed from its balance sheet, subject to a confirmation of the relevant auditor
  The financing transaction may be disclosed or undisclosed to the buyer (i.e. confidential)
• The finance provider may discount up to 100% of the receivables up front or apply a security margin or advance ratio to account for potential dilutions or cover for possible credit deterioration
• The finance provider may charge the discount in advance when paying out the discounted amount or in arrears within periods and terms pre-agreed with the seller
• Receivables Discounting may be provided on a one-off, seasonal or continuous programme basis
• The facility may be provided on an uncommitted or committed basis to the seller, the latter giving the seller a higher level of comfort in terms of access to liquidity within the buyer credit limits set by the finance provider. The likely offer of committed or uncommitted facilities may vary from one geographic market to another
• In the event that the transaction is disclosed to the buyer, the process of the collection of the receivables may be undertaken by either the seller (acting as agent for the finance provider which has purchased the receivable) or by the finance provider. In the event that the transaction is disclosed to the buyer, the buyer may be asked to acknowledge the sale of the receivables. The exact form of such acknowledgement will depend on the local jurisdiction, the size or structure of the transaction or the commercial preferences of the buyer and the finance provider
• A buyer may be asked to validate the existence of a receivable and indicate at a moment in time whether it is approved or accepted for payment
• The finance provider may act at its own risk or insure or share the credit risk with a third party (trade credit insurance or risk participations by other financial institutions), thus limiting its own risk exposure.

A Receivables Purchase Agreement (RPA) is executed between the seller and the finance provider. A certified copy of the invoice(s) or the invoice data set is made available to the finance provider. Under the agreement, the seller provides the finance provider with an assignment of rights to the receivables(s) being financed, according to the jurisdiction in question. Depending on the terms of the underlying Receivables Purchase Agreement, a notice of assignment may be provided to the buyer. Any additional required procedure according to the respective jurisdiction is suitably documented.

• Default or insolvency of the buyer, mitigated by credit and risk assessment, monitoring and potentially credit insurance
• Existence of valid and eligible receivables being discounted, mitigated by a regime of sampling or individual verification
• Country or political risk, mitigated by due diligence and political risk insurance. Special circumstances relating to sovereign risk may apply to receivables due from governments or government agencies
• Risks arising from the removal of recourse to the seller in the event of non-recourse or limited recourse transactions, mitigated by the buyer’s ability to pay
• Receivables dilutions (e.g. credit notes, offsets against invoices due for payment), mitigated by the security margin and advance ratio
• Pre-existing security arrangements or bans on assignments, mitigated by waivers given by other secured parties or their removal or by taking additional security and completing the required perfection requirements
• Certain types of receivables, which could be said to be ‘non-fungible’ or not comparable with typical receivables, are often avoided, for example: where long warranties have been given, or where specific warranties or recourse arrangements have been provided by the seller, or for receivables arising in contracting businesses (e.g. construction), or situations involving stage payments; alternatively such receivables could be converted into ‘fungible units’ that meet the quality requirements of a Receivables Discounting transaction. In general, the finance provider will exclude prohibited and restrictive categories of goods. Restrictions may also be applied in the case of intercompany receivables
• KYC/AML to be handled during the on-boarding procedures and subsequently in periodic reviews
• Lack of legal authority, mitigated by legal due diligence on the respective jurisdiction and the involved contractual parties
• Set off and risks arising from counter-trading mitigated by regular verification for disclosed transactions that the balance outstanding with the finance provider matches that on the buyer’s records
• Risks arising in the event of insolvency such as ‘claw-back’, where a finance provider is aware of distress at the time of a receivable purchase, or in the case of co-mingling of funds in a general bank account. For the latter, there is mitigation through the use of a collection account in the name of the finance provider
• Fraud by the seller, for example by inflating the value of invoices or offering invoices without an underlying commercial transaction, mitigated by verification of the transaction and deploying adequate credit controls
• Double financing, mitigated by obtaining a security interest in the receivables, applying appropriate KYC procedures and perfecting the assignment of rights to the receivable, including notification to the buyer
• Fraud by collusion between seller and one or more of its buyers leading to diversion of funds from meeting maturing obligations, mitigated by monitoring the financial health and management integrity of the client through maintaining contact and receiving regular management information to look for signs of a deterioration of the business and suspicious circumstances, and also mitigated, where necessary, by direct collections on the part of the finance provider
• Fraud by collusion between the seller and an employee of the finance provider, mitigated by internal controls and segregation of duties
• General operational risks resulting from multiple operational requirements to perfect title to the receivables and undertake ongoing administration, mitigated by sound procedures, appropriate levels of automation and process controls
• Potential issues with the assignment of receivables due to various underlying governing laws in place and the resultant enforceability of the transaction, in both domestic and cross-border situations mitigated by legal due diligence.

All the above risks are also mitigated by a robust audit process regarding transactions, systems, and controls.

Source: Global SCF Forum

For sellers:

• Potentially allows the seller to provide extended credit terms to its buyer
• Working capital optimisation
• Growth in business on ‘open account’ terms
• Finance and liquidity availability with limited credit availability from traditional banking sources
• Potential for balance sheet management via ‘true sale’ of the receivables under the relevant legal structures
• Credit risk coverage in non-recourse Receivables Discounting as the finance provider will be responsible for normally 100% of any losses arising from the credit covered receivables if the buyer defaultsa
• Reduction of the concentration risk by distributing risk to a finance provider
• Better utilisation of the seller’s financial and operational resources if the sale of the receivable is disclosed and collection is handled by the finance provider
• Confidentiality of the source of finance from the buyer in the case of an un-disclosed contractual relationship between the seller and the finance provider
• Possible improved balance sheet management as the sale of receivables generates off balance sheet liquidity without creating additional leverage or use of credit facilities (as would be the case with a traditional loan facility).

For buyers, potentially extended payment terms and improved stability of its supply chain.

For finance providers, credit exposure with a lower risk profile due to the supply chain-related nature of the financed transaction.

Such financings are typically offered by one finance provider to a client although in the event of very large volumes, distribution techniques may be used, such as risk participations or syndications.