Misconceptions swirl around the pitfalls of true sale accounts receivables. Some corporate treasurers and CFOs perceive true sales to be too expensive, presenting red flags to investors. However, many companies tap into the strategy to unlock cash, enhancing their capital position.
What is True Sale Receivables Finance?
“True sale” refers to a transaction in which ownership and all interest in an asset is completely transferred from the original owner (the seller) to another party (the buyer). The buyer assumes all risks and benefits associated with the asset, and the seller no longer has any rights or control over the asset.
Cost of financing achieved through the sale of receivables can be advantageous, especially where funds are owed by high-quality customers. Long and prosperous relationships between the seller and their customers can lead to high advance rates, leading to an efficient and predictable source of funds for the seller.
How Corporates Benefit from True Sale Receivables
Improved Balance Sheet
Many corporates have specific targets in relation to earnings calls. Subject to a recognized ‘True Sale’ opinion, Receivables Finance allows the seller to convert receivables to cash. The seller improves their liquidity while avoiding the need to report additional liabilities on their balance sheet. By lowering their receivables balance against revenue, corporates can improve their DSO, accelerating cash and benefiting from reduced net structural borrowing.
Flexible Payment Terms
Customer repayment timing and processes vary considerably across industries, contracts and specific customer policy, but receivables finance offers flexibility and allows for seller choice. The seller is granted the flexibility to work with each customer’s repayment preferences, grant appropriate tenor to the debtor and manage customer risks in an approved risk framework. It also gives the seller the ability to optimize cash flow peaks and troughs according to seasonality and business needs, working with funders to build a long-term program.
Better Credit Risk Management
True sales unlock credit capacity by removing counterparty exposure from corporates’ balance sheets. Receivables Finance allows corporates to extend their prudent credit risk management policies for their long-term health and well-being and can provide a one-stop solution to manage enhanced credit with the use of funder credit capacity, insurance or other mitigation tools.
Acquisition Financing through Structural Cash Release
Many corporates tap into AR as a way to unlock trapped cash by converting receivables to structural funding on an ongoing basis. Released funding can be used for strategic initiatives, such as financing an acquisition. This is a much faster and often cheaper way to access cash and has a constant effect on the balance sheet as the program runs.
Better Rates & Opportunities through Arbitraging Borrowing Rates
The good credit standing of a corporate seller allows them to qualify for the most optimal borrowing rates. Receivables Finance typically introduces an opportunity to finance receivables due from debtors better-rated than the seller themselves. This reduces financing costs by arbitraging between relative credit costs.
True sale accounts receivables are a useful financial tool, but need to be handled strategically. Below are key considerations for understanding different factors and ways to make the process successful.
- Jurisdictions and global expansion: Jurisdictions handle true sale treatment differently due to regulations, applicable law, formalities and other considerations. Disclosures to counterparties may be required along with local filings and/or confirmation from the customer. This is particularly important with cross-border receivables where the process is more complicated in certain countries than others. You need a partner with expertise across multiple jurisdictions to help you manage global expansion.
- Existing security: Existing credit facilities secured by assets may restrict the corporates ability to sell assets when pledged as collateral. Due diligence is required, including UCC searches, pledge or lien check and legal expertise, working with bank groups to remove assets from the pledge. Most banks are agreeable to work with an expert provider to resolve security pledges (since their collateral is replaced with cash received), but bank partners must be managed sensitively
- Proper funding: It is critical to identify the correct funders and investors for various customer debts across a range of jurisdictions. Expertise must be used to identify funders prepared to work in a range of scenarios, providing steady, static, and reliable sources of funding. Capital raised can only be deployed to fund projects and fuel growth when the seller knows that funders are party to the solution for the long-term.
- Accounting disclosures: Expert authorities must be engaged to manage the parameters of the transaction, to secure a true sale opinion from the corporate’s auditor. It is essential to work with partners who understand the process to help manage internal and external accounting advisors to gain their buy-in.
True sale AR finance is a creative way for corporates to bring alternative forms of capital to their treasury toolbox. Corporates can reduce their cost of capital and improve their financial flexibility and balance sheets.
No matter what financial arrangement you ultimately pursue, it’s critical to carefully evaluate the terms and conditions of all options to choose the one that best meets your company’s needs and objectives. LiquidX can provide you with the proper guidance to navigate your transactions. To learn more about how we can help, contact our team.