Loan or Advance against receivables is financing made available to a party involved in a supply chain on the expectation of repayment from funds generated from current or future trade receivables and is usually made against the security of such receivables, but may be unsecured.
Loan or Advance against receivables
- Receivables Lending
- Receivables Finance
- Invoice Financing
- Trade Receivable Loans
- Trade Loans
In this case the loans or advances may be legally secured on a stream of future receivables or may be unsecured and simply take comfort that such receivables will be converted to cash at a future date to repay the financing. Such loans are only made where the seller (the borrower) has, or will acquire through use of the loan monies, receivables arising from its business activities as a seller of goods or services. Where the relevant receivables exist at the time the loan is made, such a loan may be considered as a type of secured loan collateralised by the receivables. Where the loan is advanced on a promise or expectation of such receivables arising at a future date, the loan is akin to working capital finance with the comfort of potential future collateral.
Varying degrees of security are possible. In some case, the finance provider may not take security at all but use the existence of the receivables as either informal comfort or as notionally satisfying financial covenants or tests imposed on the seller. It is a technique of supply chain finance, where it contributes to the operation and integration of supply chain activity. In other situations, it may be viewed as a type of corporate lending.
The finance provider and the client, a seller of goods and services.
Contractual relationships and documentation
A loan agreement (or credit facility) with applicable terms and conditions agreed between the finance provider and the client. This may contain financial covenants or tests which are capable of being satisfied by the existence of the receivables.
Where security has been agreed, a suitable security agreement will also exist under which the receivables are appropriately charged, assigned or pledged. The precise nature of this security agreement will depend on a number of factors such as the nature of the receivables, the jurisdiction involved and the commercial arrangement between the parties.
A security agreement with appropriate terms and conditions.
Risks and risk mitigation
- Creditworthiness of the client especially where no formal security is taken over the receivables, mitigated by due diligence
- Performance risk on the seller (client) which may lead to failure to create receivables, mitigated by due diligence
- Bans on Assignment, mitigated by due diligence and representations and warranties.
- Dilutions, mitigated by due diligence and presentations and warranties from the seller (client)
- Timeliness of creation of the receivables, mitigated by due diligence
- Failure to create or perfect effective security, mitigated by legal due diligence
- All the above risks are also mitigated by a robust monitoring, reporting and audit process regarding transactions, systems and controls
- All the above risks are also mitigated by a robust monitoring, reporting and audit process regarding transactions, systems and controls.
Transaction flow: illustrative only
Source: Global SCF Forum
The loan agreement will be issued in accordance with the finance provider’s usual procedures and the appropriate security as applicable perfected in the usual manner.
Monitoring of the receivables may or may not be undertaken.
In some instances, the finance provider may establish a borrowing base to regulate the amount of funding advanced (see Glossary).
- Enables access to financing on potentially better terms than without the use of receivables
- For the finance provider, security of the receivables, where taken.