Trade Receivables Securitisation (TRS) is a financing solution based on a company’s trade accounts receivable – in other words, invoices issued to clients that are fully payable and enforceable, but not yet at their due date. The solution is aimed at increasing sales and unlocking flexible liquidity in a balance sheet efficient way. The originating company typically extends payment terms offered to its buyers and sells the related receivables to a funder on a true-sale basis. In short, TRS allows a company to monetise its A/R.
Once solely reserved for the largest multinationals, advances in technology and the emergence of third-party specialists, like Finvex.tech, has meant companies of smaller sizes and in a variety of sectors can now take advantage of the benefits of securitisation.
TRS involves the sale of a company’s portfolio of receivables to a newly created, legally-separate company known as a special purpose vehicle (SPV). The SPV purchases the receivables at a discounted price. The sale is funded by issuing notes or other debt instruments to investors such as banks, asset managers or specialist investors. The sale of receivables is structured as a legal true sale, and the SPV needs to meet certain structural requirements, to ensure bankruptcy-remoteness from the originating company.
When properly structured and implemented, TRS can significantly benefit both the originating company and its buyers. The ability to convert what is normally the largest asset on a company’s balance sheet into cost-effective funding is very advantageous.
One of the most compelling reasons to establish a TRS program is to diversify funding sources via accessing the capital markets. This is especially true for companies that have weaker creditworthiness than their buyers and/or companies with long sales cycles and terms of sale.
TRS is based on a portfolio approach. Adhering to specific and transparent risk methodologies means investors take the risk on the receivables portfolio as a whole, as opposed to just the originating company. Because the company’s receivables are legally isolated from their bankruptcy estate, the transactions carry a lower risk profile which is reflected in lower financing costs compared to other forms of corporate debt.
Securitization increases a company’s operating cash flow and total liquidity. The ability to deconsolidate receivables from their balance sheet, and associated debt, can be a substantial benefit for companies. Debt-to-equity, return on assets, days sales outstanding, and the ‘quick’ ratio can all be improved by securitisation.
TRS allows the development of a strong competitive advantage versus other players in the market. It promotes strengthened relationships with buyers, which also gain important benefits. Securitisation is a way to finance sales growth without impacting leverage, and at the same time reduce credit risk and improve working capital.
Companies considering TRS are often first-time issuers. To ensure success, TRS programmes need to be adequately structured, and, more importantly, the right servicing engine needs to be engaged in processing the programme. Considerable know-how and resources are required to facilitate the ongoing reporting necessary for funders. Since trade receivables are typically short duration assets with rapidly changing performance, the timely reporting of these assets to funders is critical to a successful program.
Many companies will elect for their transactions to be arranged by a third party. Monitoring, reporting, and payment support services by a third-party servicer, like Finvex.tech, not only strengthens investor confidence but is critical to ensure the company is meeting local regulatory and legal requirements. Once activated, securitisation programmes run seamlessly for a long time.
Finvex has developed a proprietary, cloud-based platform which draws accounts receivable data directly from a company’s ERP system. Our technology allows for automated processing and daily performance reporting. This automation significantly reduces funding, reporting and administrative costs, while minimising the risk of fraud and human error involved in the reporting process.
Our online dashboards allow treasurers to view real time performance of transactions and underlying portfolio data down to an invoice level. Real-time reporting shows discounts and fees on an invoice level to support optimal accounting treatment. Total transparency means the associated risk for the funder is minimised and that reflects in the advance rates.
With Finvex, it’s easy to manage your working capital program from anywhere, in real-time. Let us do the heavy lifting. Your company is essentially only involved in the sales of the receivable. Maximise liquidity. Gain visibility and control. With Finvex.
Speak to us today to find out more about setting up your own TRS program.