A type of business financing where a company uses its outstanding invoices (receivables) as collateral to obtain immediate cash.
Accounts Receivable Financing (also called Invoice Financing or Receivables-Based Lending) allows businesses to unlock cash tied up in unpaid invoices. Two main forms: Factoring (selling receivables to a factor at a discount — typically 80–90% advance) and Invoice Discounting (borrowing against receivables as collateral — invoice stays with you). This solves the cash flow gap between invoice issuance and payment receipt (30–90 days typically). Popular with SMEs that have strong customers but long payment cycles. In India, TReDS (Trade Receivables Discounting System) platforms like M1xchange and RXIL facilitate this for MSME invoices from large corporates.
Company has ₹10,00,000 invoice due in 60 days from a listed company. Factor offers 85% advance at 1.2% per month. Advance: ₹8,50,000 (received immediately). After 60 days when customer pays: Factor deducts fee ₹8,50,000 × 1.2% × 2 months = ₹20,400. Balance returned: ₹1,50,000 – ₹20,400 = ₹1,29,600. Total received: ₹9,79,600 on a ₹10L invoice. Cost of early access: ₹20,400.
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Factoring: You SELL the invoice to the factor. The factor collects payment directly from your customer (customer knows about the arrangement). You get 80-90% upfront. Invoice Discounting: You BORROW against invoices as collateral. You still collect from customers yourself (confidential — customer doesn't know). Higher advance rates (90%+) but you manage collections.
TReDS (Trade Receivables Discounting System) is an RBI-regulated platform where MSMEs can auction their invoices from large corporates/PSUs to multiple financiers (banks/NBFCs), getting competitive rates. Platforms: M1xchange, RXIL, Invoicemart. Benefit: MSMEs get paid in 48 hours instead of 60-90 days. All PSUs and corporates with turnover >₹500 crore must register on TReDS.
Money owed to a business by its customers for goods or services delivered but not yet paid for.
A financial arrangement where a business sells its entire accounts receivable to a third party (factor) at a discount to obtain immediate cash.
A form of short-term borrowing where a business uses its unpaid invoices as collateral to receive immediate cash from a financier, while retaining control of collections.
The net amount of cash and cash equivalents moving into and out of a business during a specific period.
The difference between a company's current assets and current liabilities, representing the short-term liquidity available for day-to-day operations.
A short-term financing method where a business sells its trade receivable (bill of exchange) to a bank at a discount to receive immediate cash before the bill's due date.
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