What is accounts receivable securitization?

Accounts receivable securitization is a way for a company to turn the invoices its customers owe into cash, at the kind of rates usually reserved for the largest borrowers. Instead of borrowing against its receivables, the company sells them to a separate legal entity set up for the purpose, and that entity is funded by banks or capital markets investors.

It sits at the top of what we call the funding ladder: factoring, non-bank lenders and private credit, bank lines, and then securitization. Each rung is cheaper and harder to qualify for than the one below. This guide explains how the top rung works, why it costs less, and what has changed about who can use it.

How accounts receivable securitization works

A typical program has five moving parts.

1. The seller. A company that sells to other businesses on credit terms, for example net 30 or net 60. Its unpaid invoices are its receivables.
2. The special purpose vehicle (SPV). A separate company that exists only to buy and hold the seller's receivables. It is designed to be bankruptcy remote: if the seller ran into trouble, its creditors could not reach the receivables the SPV owns.
3. The true sale. The seller sells eligible receivables to the SPV outright, usually every day as new invoices are issued. The sale is documented so that it holds up as a sale, not a disguised loan.
4. The funders. Banks, insurers or investors lend to the SPV or buy notes it issues. They fund an agreed share of the eligible receivables, called the advance rate. The rest stays with the seller as a cushion against dilution and losses.
5. The collection account. Customers pay into an account the program controls. Collections repay the funders or buy the next batch of invoices, so the facility revolves for as long as the company keeps selling.

Around these parts sit the people who keep the program honest: a servicer who manages collections and reporting, often a trustee or agent who watches the cash, and the insurers or rating agencies who assess the risk.

Why securitization is cheaper than other ways to fund receivables

Three things let funders price a securitization tightly.

• They take receivables risk, not company risk. A well built program isolates a pool of short-dated invoices owed by many customers. Funders analyze how those customers pay, not the seller's leverage or growth plans.
• Structure absorbs the first losses. Eligibility criteria, concentration limits, reserves and the seller's retained share all stand between a bad invoice and the funders' money.
• Credit insurance can carry the credit. When the receivables are covered by trade credit insurance, a highly rated insurer stands behind customer non-payment, and funders can price the pool largely off the insurer rather than off each customer. See how trade credit insurance lowers your cost of capital.

The result is the lowest cost of capital available for receivables. Indicatively, securitization funds at single digits a year, against high teens and up for factoring. Your rate depends on your insurer, your customers, your terms and your volume.

Who has used it, and why that is changing

Large companies have securitized their receivables for decades. Mid-market companies mostly have not, for a simple reason: setting up and running a program is expensive. Legal structuring, investor work, daily eligibility tests, cash reconciliation and monthly reporting are much the same work whether the pool is large or small, so only large pools could absorb the fixed cost.

Two changes have moved that line:

• Trade credit insurance gives a mid-market pool the credit quality funders need, without each funder having to underwrite hundreds of customers.
• Automation takes the cost out of the daily work: verifying invoices, applying cash, checking eligibility and limits, and reporting to insurers and investors.

Together they make it practical to take a mid-market company straight to securitization without first climbing every rung below.

What a company needs to securitize its receivables

• Business customers on credit terms. Invoices to other businesses, payable in days or weeks rather than years.
• Customers an insurer will cover, or a trade credit insurance policy already in place.
• Clean receivables data from an accounting system or ERP, so every invoice can be traced and verified.
• A collection account that customers pay into.
• Willingness to fix gaps once, for example confirming invoices with customers or tightening how credit notes are issued.

How Invoice Ledger does it

Invoice Ledger runs the whole program for you. We place or reuse your credit insurance, set up the structure and the legal documents, bring the investors and place the funding, verify every invoice, run the collection account and reconciliation, test eligibility and limits every day, report to the insurer and investors, and handle every renewal. You review your AR workflow with us once, close any gaps, and then keep invoicing your customers the way you do today.

To see what your receivables could cost to fund at the top of the ladder, get your rate or model your own book. New to the vocabulary? The receivables finance glossary defines every term used here.