The volatility caused by the global health crisis has prompted many finance executives to reinspect the impact of late payments on overall supply-chain health. Even prior to the global health crisis, 78% of accounts payable departments admitted to paying invoices late. Now, as more companies face a cash flow crunch and an extended economic recovery timeline, the stakes are much higher.

The current economic landscape has put a significant strain on cash flow for companies of all sizes. Some are experiencing unexpected surges in demand, and are struggling to keep pace. Others are dealing with the aftermath of factory closures, heightened safety requirements, or a decline in orders. Either way, companies must simultaneously balance today’s needs while preparing for any future requirements — and that requires cash.

Growing demand for liquidity and timely payment across the supply chain is driving record interest in alternative financing solutions. Companies are looking for ways to monetize their liquid assets and unlock cash trapped in the financial supply chain. One option is accounts receivable finance, which allows companies to sell their invoices to financial institutions for faster payment. It’s an attractive option for companies that seek new ways to improve cash flow.

Put simply, accounts receivable finance connects a seller and purchaser of an accounts receivable. The seller is able to advance payment on its receivable in exchange for a small financing fee, and the purchaser is able to gain attractive short-term assets.

There are three primary forms of accounts receivable finance: asset-based lending, traditional factoring, and selective receivables finance. Given the scale of current liquidity requirements across the supply chain, many companies are questioning which of these three options is the most efficient liquidity solution. As many finance executives seek to strengthen balance sheets and shore up capital, the answer is often “selective receivables finance.” It offers competitive pricing and flexibility for companies to advance payment on their accounts receivable. Advantages include:

Flexibility and control at a competitive price. Selective receivables finance allows businesses to choose which invoices to submit for early payment based on their own unique business needs. This option typically targets the company’s largest customers, unlocking more liquidity faster. Because it takes both the company and its customer’s credit rating into consideration, interest rates and financing fees are generally much more competitive than other solutions.

Mid-market friendly. Especially for mid-market companies who may not have the leverage or credit rating to secure other unsecured financing options, and are limited to secured debt such as commercial or asset-based lending, selective receivables finance is an accessible, hassle-free solution to unlock cash.

Non-debt solution. When properly implemented and disclosed, selective receivables finance transactions do not count as debt on the balance sheet. These transactions are a true sale of receivables — not a loan — meaning there is no risk of reclassification, and no negative impact on debt ratio or other outstanding lines of credit.

Outlook

As we continue to navigate the current challenging economic climate, companies of all sizes need new ways to increase cash flow that don’t have a negative impact on the balance sheet. New innovations under the umbrella of accounts receivable finance aim to extend the power of early payment to a broader audience, at a competitive cost and with greater flexibility.

Julie Erwin is Director of Receivables Finance with PrimeRevenue.