Raising funds against the future receivables is called receivable financing. Any Sales Order, Purchase Order, Approved Contracts, Trade Agreements, Bills and Invoices raised can be used to raise funds. Account receivable financing, loan against receivable, these are different jargons used for receivable financing. Let us discuss more with an example for an agribusiness entity

Will use the example of a miller, he had procured good amount of grains last season and converted the grains into flour. His buyers raised a purchase order of 10MT wheat flour, miller supplied flour to his warehouses. They had an arrangement of 15 days credit period. Now millers money is stuck for next 15 days, whereas he needed the money for further procurement. Here he went to a financier, financing company will ask him to route the money to be received (after 15 days) against the invoices raised by miller to financier’s account and get the funding against those receivables by paying the interest and margins. This creates a win-win situation for both lender and borrower.

Here catch is to have buyers’ whose receivables to be submitted with financier, must have large transactions and good business vintage with miller. Since in lending against the receivables, the strength of buyer is important. A well reputed buyer having credible CIBIL score and you are good to opt for receivable finance. Routing of funds can be done by establishing escrow mechanism, will discuss in detail about this in next post.