Accounts Receivable Financing, an Option for Businesses During COVID-19

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Despite the fact that the economic reopening has started, uncertainty, as well as the extent and duration of the crisis, remains a question for businesses nationwide and globally.

In view of this, consultants and specialists emphasize that the best way to prepare for it is to understand its risks and vulnerability from an operational and financial perspective. In this perspective, an efficient level of liquidity and strategies related to cash flow management are essential as main advice from experts.


But, while in the last quarter of 2020, investment, consumption and exports in Mexico register the biggest drops of all records of National Institute of Statistics and Geography (Inegi) , the natural question is: How can businesses improve their finances?

The immediate answer is funding. However, another challenge arises.

Photo: Michele Henderson Going through Unsplash

The conditions for accessing and applying for a loan during the last quarters of the year were also strongly affected : not only that is it companies apply for less loans for fear of not being able to meet the debt obligation, but banks and financial institutions have become stricter in terms and standards of approval.

This does not mean that financing is completely excluded, as there are still other ways to finance your operations without getting into more debt. Reducing inventory days, renegotiating payment terms with customers and suppliers, are some of the options, but one of the most important for the possibilities it offers is financing of accounts receivable.

How does accounts receivable financing work?

As the name suggests, this is a way to finance your operation using your accounts receivable, that is, payments of invoices for which you have already made a sale, but which are on credit that you have offered to your customers (generally 60 to 90 days).

While loans typically require collateral as collateral and involve financial leverage (i.e. debt), this pattern is a Commercial transaction, through which you “sell” your receivables to a third party (called factor, which consists of a company specializing in financing, or development banking institutions), in this way you receive the money agreed in advance.

Also known as invoice discounting or factoring, this type of financing has been seen as an attractive option for financing the operation of Mexican businesses by organizations such as the Inter-American Development Bank (IDB Invest).

Here’s how an accounts receivable financing transaction typically works:

Image: Capital drip.

Another of its great advantages is that it has minimal tax and accounting implications: the main difference, in terms of tax documents or invoicing, will be the issuance of payment supplements in accordance with annex 20 of electronic invoicing .

The working capital you acquire goes directly into cash and is reflected in your assets on your balance sheet, so it’s a way to inject cash and have better cash flow.

In terms of costs, the factor generally charges a factoring fees , plus interest. For example, if your company requested financing for an invoice worth 50 thousand dollars , you would receive an advance of 40 thousand dollars and the approximate fee, based on days funded (for this example it will be 60 days) and credit approval (1.0% for the purpose of this case), the cost would be one thousand dollars.

The following months will still have many challenges for Mexican businesses, so prioritize the strategies that help them achieve Healthier balance sheets and easily accessible working capital are a vital weapon in the face of the crisis. Funding is a first step in getting there as we find out what the “new normal” will look like after the pandemic.

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