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  • Home
  • About
  • Podcast
    • Summaries
    • Articles
  • Invoice Finance
    • Basics
      • What is Invoice Finance?
      • What is Reverse Factoring?
      • What are Trade Receivables?
      • What is the Cash Conversion Cycle?
      • What is Days Inventory Outstanding?
      • What is Days Sales Outstanding?
      • What is Days Payable Outstanding?
    • Advanced
      • Invoice Validation and Fraud Detection
      • Reasons Why Invoice Finance is Better than a Bank Loan
      • How to Choose the Right Factoring Firm for Your Business
      • A Closer Look at Factoring Agreements
      • What is Trade Receivables Securitisation?
      • Breakdown of the Costs for Factoring
    • Factoring
      • Why Companies Use Invoice Factoring
      • What Companies are Suitable for Invoice Factoring?
      • Factoring and Invoice Discounting
      • How Factoring Works
      • Asset Based Lending
      • Is Factoring Right for Your Company?
      • Accounting for Factoring
      • How a Company Enters into a Factoring Agreement
      • The Costs Involved in Factoring
      • Changing Factoring Company
      • The Relationship Between the Factoring Company and the Debtor
      • Legal Aspects of a Factoring Company Pursuing Payment Through the Courts
      • Factoring in the Construction Industry
    • Fraud
      • Types of Invoice Fraud
      • How to Combat Invoice Fraud
    • E-Invoicing
      • Legal Status of Electronic Invoicing
      • The Benefits of E-Invoicing
      • Implementing an E-Invoice System
      • E-Invoicing Adoption in Mexico and The Rest of the World
  • Brokers
    • UK Brokerage Firms
  • Factoring Firms
    • Europe
      • UK
      • France
      • Germany
      • Italy
      • Spain
      • Holland
    • North America
      • USA
      • Canada
    • Australasia
      • Australia
      • New Zealand
  • Hi-Tech
    • Digital Platform/IT/Software Providers
    • UK Fintech
    • Articles
      • Enhancing Fintech Interoperability: Digitalizing Trade Documents for Efficiency and Security
      • The 7 Types of AI and Their Implications for the Future
      • Transforming Trade Finance: The Role of AI
      • The Different Programming Languages Used in Fintech Companies and Financial Institutions
      • UK and US Authorities Intervene in AI Sector
      • Web3 Applications and the Future of Trade Finance
      • What is Web 3?
      • What Can Fintech do for You?
      • What is Fintech?
      • Tokenisation of Finance
      • Payment Services in the Invoice Finance Sector
      • What is ChatGPT and Why the Fuss?
  • Rating Agencies
  • Securitisation
    • Deal Arrangers
    • Book Runners
    • Articles
      • The Roles of Deal Arrangers and Book Runners in Securitization
      • What is Trade Receivables Securitisation?
      • The Appeal of Trade Receivables Securitisation
      • Risk Mitigation for Trade Receivables Securitisation
  • Legal
    • Law Firms
    • Articles
      • A Guide to Accounts Receivable Purchase Agreements and Invoice Discounting Agreements
      • The Challenges of KYC and AML Checks
      • What is The Model Law on Electronic Transferable Records (MLETR)?
      • Snapshot of Factoring Legal Schemes in England and Wales
      • How are UK Factoring Firms Regulated?
      • What is ISO20022 and Why is it Important?
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    • Economic Indicators
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      • Economic Forecast for the UK in 2023
      • Economic News for 2022
      • Financial Crisis or Not?
      • Credit Suisse Bailout
  • Credit Insurers
    • Credit Insurers
    • Articles
      • Credit Insurance Legal Aspects
      • Credit Insurance in Trade Receivables Financing
      • The Benefits of Credit Insurance in Invoice Finance
      • Eligibility Requirements for Capital Relief by Using Credit Insurance
      • What are Export Credits and Country Risk Classifications?
      • How the War in Ukraine Affects the Price of Credit Insurance for Trade Finance
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Home Invoice Factoring

What are Trade Receivables?

John Goodden by John Goodden
February 7, 2023
in Invoice Factoring, Invoice Finance, Supply Chain Finance
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What are Trade Receivables?
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Download file | Play in new window | Duration: 5:23 | Recorded on September 5, 2022

Trade receivables are accounts receivables that arise from commercial transactions. 

A distinction needs to be made between trade and non-trade receivables. Whereas trade receivables are promises of payment for goods and services delivered, non-trade receivables are promises of money that arise from things other than trade. These could include tax refunds or insurance claim pay-outs.

Trade receivables are put in the current assets section of a balance sheet if the money is expected to be paid within a year; they represent the accounts receivable for goods and services that have been sold but not paid for.

Trade Receivables Financing

Trade receivables financing, also known as Invoice Finance, is when a company uses trade receivables to raise money. Essentially, a company has unpaid invoices that they can use to raise cash. One common way to do this is to approach a factoring firm that will buy the outstanding invoices for a discount in return for an instant cash payment normally between 75% and 90% of the face value of the invoice, minus costs.

So, if a company has an outstanding invoice worth £5,000 that is not due to be paid for 90 days it might make good financial sense to sell the invoice to a factoring firm for £4,850 in return for immediate payment.

While in the above scenario a company might be ‘down’ £150 on the deal, it might be preferable to a situation where the company desperately needs cash to fulfill current orders and meet its liabilities. This might be preferable to a bridging loan from a bank that might involve collateral, thus placing the company’s assets at risk if the loan is defaulted on.

Having to wait for payment for goods and services ties up money that could be spent on recurring expenses such as wage bills and costs for materials. It could be invested in machinery or research and development (R&D). It can be hard to keep on filling orders when the payments are delayed, stretching cash flow.

Early Payment  Discount Programs

An early payment program is another type of trade finance. It involves the buyer being offered a reduction on the full amount specified in the invoice if the buyer pays earlier than the maturity date set on the invoice. 

Early payment programs are also referred to as ‘cash discount’ or ‘early payment discounting’.

There are two methods for early payment discounting. The first is dynamic discounting. This is a system where the buyer gives the supplier the choice of whether to receive early payment on their invoices in return for a reduction in the invoice amount.

With dynamic discounting the supplier has the power to decide which specific invoices it wishes to offer discounts for in return for early payment. The discount rate is calculated using a sliding-scale annual percentage rate (APR). In other words, the size of the discount is determined by how quickly payment is made. Thus, the invoice amount due is smaller for a payment made after 5 days than for a payment made after 14 days. 

The second method is when the supplier offers the buyer a discount in exchange for an early payment. This method is particularly suited to smaller suppliers that are often not considered for dynamic discounting programs. As with dynamic discounting the sooner the payment is made, the larger the discount. The terms of the discounting are set out in tiers:

First Tier – If a company pays within 10 days it will receive a 2% discount (and no discount if it pays on day 30)

Second Tier – If a company pays within 20 days it will receive a 1% discount (and no discount if it pays on day 30)

The ‘tier’ approach to discounting gives the buyer the flexibility to choose which discount tier is most advantageous. While delaying payment improves days payable outstanding, this second type of early discounting reduces the cost of materials and services. 

The difference between the two approaches essentially boils down to whether it is the buyer or supplier that suggests a reduction in the amount invoiced in return for early payment. However, both methods for early payment provide a flexible financial solution that can be used to manage cash flow and the demands of the supply chain. 

In Summary

Trade receivables are unpaid invoices. Goods or services are provided and an invoice is sent to the buyer. Until the invoice is paid it remains a trade receivable. Trade receivables financing, also known as Invoice Finance, is when a company uses trade receivables to raise money.

Alternatively the buyer or seller can offer an early payment program to facilitate the quicker payment of trade receivables.

Tags: accounts receivablesdays payable outstandingdays sales outstandingearly payment programtrade receivablesworking capital
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  • Home
  • About
  • Podcast
    • Summaries
    • Articles
  • Invoice Finance
    • Basics
      • What is Invoice Finance?
      • What is Reverse Factoring?
      • What are Trade Receivables?
      • What is the Cash Conversion Cycle?
      • What is Days Inventory Outstanding?
      • What is Days Sales Outstanding?
      • What is Days Payable Outstanding?
    • Advanced
      • Invoice Validation and Fraud Detection
      • Reasons Why Invoice Finance is Better than a Bank Loan
      • How to Choose the Right Factoring Firm for Your Business
      • A Closer Look at Factoring Agreements
      • What is Trade Receivables Securitisation?
      • Breakdown of the Costs for Factoring
    • Factoring
      • Why Companies Use Invoice Factoring
      • What Companies are Suitable for Invoice Factoring?
      • Factoring and Invoice Discounting
      • How Factoring Works
      • Asset Based Lending
      • Is Factoring Right for Your Company?
      • Accounting for Factoring
      • How a Company Enters into a Factoring Agreement
      • The Costs Involved in Factoring
      • Changing Factoring Company
      • The Relationship Between the Factoring Company and the Debtor
      • Legal Aspects of a Factoring Company Pursuing Payment Through the Courts
      • Factoring in the Construction Industry
    • Fraud
      • Types of Invoice Fraud
      • How to Combat Invoice Fraud
    • E-Invoicing
      • Legal Status of Electronic Invoicing
      • The Benefits of E-Invoicing
      • Implementing an E-Invoice System
      • E-Invoicing Adoption in Mexico and The Rest of the World
  • Brokers
    • UK Brokerage Firms
  • Factoring Firms
    • Europe
      • UK
      • France
      • Germany
      • Italy
      • Spain
      • Holland
    • North America
      • USA
      • Canada
    • Australasia
      • Australia
      • New Zealand
  • Hi-Tech
    • Digital Platform/IT/Software Providers
    • UK Fintech
    • Articles
      • Enhancing Fintech Interoperability: Digitalizing Trade Documents for Efficiency and Security
      • The 7 Types of AI and Their Implications for the Future
      • Transforming Trade Finance: The Role of AI
      • The Different Programming Languages Used in Fintech Companies and Financial Institutions
      • UK and US Authorities Intervene in AI Sector
      • Web3 Applications and the Future of Trade Finance
      • What is Web 3?
      • What Can Fintech do for You?
      • What is Fintech?
      • Tokenisation of Finance
      • Payment Services in the Invoice Finance Sector
      • What is ChatGPT and Why the Fuss?
  • Rating Agencies
  • Securitisation
    • Deal Arrangers
    • Book Runners
    • Articles
      • The Roles of Deal Arrangers and Book Runners in Securitization
      • What is Trade Receivables Securitisation?
      • The Appeal of Trade Receivables Securitisation
      • Risk Mitigation for Trade Receivables Securitisation
  • Legal
    • Law Firms
    • Articles
      • A Guide to Accounts Receivable Purchase Agreements and Invoice Discounting Agreements
      • The Challenges of KYC and AML Checks
      • What is The Model Law on Electronic Transferable Records (MLETR)?
      • Snapshot of Factoring Legal Schemes in England and Wales
      • How are UK Factoring Firms Regulated?
      • What is ISO20022 and Why is it Important?
  • Rates
  • Economy
    • Economic Indicators
    • Articles
      • The Collapse of the Russian Rouble: An Historical Analysis and Current Implications
      • The Current State of the UK Economy
      • Economic Forecast for the UK in 2023
      • Economic News for 2022
      • Financial Crisis or Not?
      • Credit Suisse Bailout
  • Credit Insurers
    • Credit Insurers
    • Articles
      • Credit Insurance Legal Aspects
      • Credit Insurance in Trade Receivables Financing
      • The Benefits of Credit Insurance in Invoice Finance
      • Eligibility Requirements for Capital Relief by Using Credit Insurance
      • What are Export Credits and Country Risk Classifications?
      • How the War in Ukraine Affects the Price of Credit Insurance for Trade Finance
  • Associations
  • ESG
    • ESG Articles
    • ESG Resources
  • Crypto Finance
    • Ripple (XRP) Wins Latest Battle with SEC
    • UK Passes Financial Services and Markets Act 2023
    • Latest about the UK Regulatory Proposal for Crypto Assets
    • How will MiCA (Markets in Crypto Assets) Regulation Affect Trade Finance and the Banking System?
    • Markets in Crypto Act (MiCA) Becomes EU Law
    • An Introduction to EU’s Markets in Crypto-Assets (MiCA) Law 
    • Supply Chains and Blockchain Technology
    • The DeFi Revolution
    • How DeFi Fulfils the Functions of Finance
    • Taxonomy of Crypto Assets
    • Crypto Currencies
  • Interviews
    • Interview with Tradeshift
    • Interview with Kyriba
    • Interview with Orbian
    • Interview with Crossflow
    • Interview with Dancerace
    • Interview with BlackLine
    • Interview with Novicap Part One
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    • Interview with A P Trade Finance
    • Interview with vabble
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