If you own a business, chances are you've already needed extra cash to meet the month's obligations. In this case, the loan is the first solution that comes to the minds of entrepreneurs. However, there is still another possibility: the anticipation of receivables.
With the operation, it is possible to receive the money you need without creating another debt for the company, as the operator uses the funds to be received. In addition, it is a quick solution and solves the institution's financial problem in a few days, depending on the agreement reached.
The main purpose of prepayment of receivables is to move the working capital of the company, without creating greater damage to the cash flow in the future. However, for this, the manager needs to understand every detail of the operation, prepare a good plan and choose the best financial institution.
To better explain what prepayment of receivables is and how the operation works, this article will answer:
- What does it mean to anticipate receivables?
- Who can anticipate receivables?
- How to prepay receivables?
- How is it calculated? Are there fees?
- What are the advantages and disadvantages of prepaying receivables?
- Are prepayment of receivables and salary advance the same thing?
What does it mean to anticipate receivables?
What is a prepayment of receivables is certainly the main question on the subject. This is a credit advance modality for companies that makes it possible to receive amounts due before the deadline, as parcels of a credit card.
The operation is completely legal and must be carried out through companies specialized in the service or fintech. Therefore, it is possible to request an advance in the receipt of amounts from bank slips, credit cards, checks, booklets, instalments or instalment sales, among others.
Who can anticipate receivables?
Companies from all sectors of the economy can prepay receivables when there is a need to increase cash flow and move the company's working capital to maintain its obligations.
For this, the institution needs to have amounts to be received in the long term, as the idea is just to receive it beforehand and not take out a loan. The aim is to keep the company up and running without new financial problems.
In this article from our blog, we cover other amazing tips to improve your company's cash flow.
How to prepay receivables?
First of all, the manager needs to make financial planning to understand if it is necessary to make advance credit. If there is no way out, the idea is to draw an adequate amount to cover expenses without harming future financial health.
With this information in hand, it's time to contact a company specialized in advance payment of receivables and request the conditions for carrying out the advance payment of receivables. It is worth noting that each company will have its particularities, including fees and the deadline for receiving the amount.
These companies can be traditional financial institutions or fintech, which offer technological platforms to facilitate transactions.
It is extremely important that the financial manager pays attention to all the information provided by the chosen institution. Also, consider making a comparison between companies and selecting the one that offers the best conditions.
After that, it's time to register the data so the specialized company can find out which titles will make the advance credit, for example, which is the credit card machine or which post-dated checks.
In addition, the manager informs which account he wants to receive the amount. The deadline for the amount to become available will depend on the agreement between the parties.. From that moment on, the company that anticipated the amount is responsible for receiving the amounts owed by the customer.
How is it calculated? Are there fees?
As mentioned in the previous item, each company has its own conditions to anticipate receivables. The main one is the application of fees. In general, they are much smaller than the interest on loans and therefore more advantageous.
However, before making the advance on receivables, it is essential to calculate the rates to understand whether it will be harmful or beneficial to the financial health of your company. Each financial institution will have its model, but fees can be:
- percentage discount rate per title;
- fixed rate for each advance title;
- transaction fee;
- advance fee;
- IOF fee.
Example of Prepayment of Receivables Calculation
For ease of viewing, here is a practical example of calculating the prepayment of receivables:
We will consider the anticipation of the value of purchase on a credit card from £3,000.00 in three instalments.
Therefore, the first discount is already made at this time:
3,000 -5% = 2,850.
The company has to receive, so, BRL 2,850.00. As the sale was divided into 3 instalments, the amount receivable every 30, 60 and 90 days is £950.00.
It is on this amount that the advance fee will be applied (which varies according to the chosen financial institution). We will work with a percentage of 3% per instalment.
Therefore, the calculation will be:
- installment 1 (30 days) — 3% of 950 = 28.50
- parcel 2 (60 days) — 3% of 950 × 2 = 57
- installment 3 (90 days) — 3% of 950 × 3 = 85.50
TOTAL SUM: BRL 171.00
In the final calculation, the company will have £171 discounted from the initial amount of £2,850.00. In this case, we are only analyzing the advance fee. It is necessary to perform calculations like this for each fee charged by the financial institution before requesting advance credit.
It is not possible to answer whether the operation is worthwhile for all companies, as it will depend on the situation in which each one finds itself. It is necessary to keep in mind what the anticipation of receivables should improve the company's financial health and not worsen in the long run.
What are the advantages and disadvantages of prepaying receivables?
One of the main advantages of anticipating receivables is that company requesting the advance is using its own resources to cover the expenditure. Therefore, it is not necessary to apply for loans that have very high-interest rates. Therefore, the financial manager would pay off his immediate debts with an amount that he would only receive a few months from now.
Another positive point is the ease in contracting the prepayment of receivables because this amount is already expected to reach the company's bank account. No need for proof of credit to pass security to the financial institution. On the other hand, there are also disadvantages to the operation if it is not well managed.
This advance money may be missed in the future when the bills for the next few months arrive. That is why It is essential to plan so that the anticipation of receivables does not become a routine process in your business.
It is also important to highlight that the company is anticipating amounts that have not yet been paid by the customer. In this way, if there is a default, the consequences can be negative, as the responsibility to reimburse the financial institution belongs to the company contracting the credit.
In some cases, fines and interest are still charged. One way to avoid these surprises is to know your customers' payer profile.
If the delinquency is high, the ideal is not to anticipate credit. Furthermore, understanding all the details of how the prepayment of receivables works and what fees are charged will avoid future discomfort.
Are prepayment of receivables and salary advance the same thing?
Prepayment of receivables and salary advances seem to have the same concept but are very different. The first, is about a company contracting a financial institution to advance amounts that it should receive in the future from its customers. This is a financial transaction carried out between two independent companies.
already the salary advance is the payment of part of the worker's remuneration. The company can make this payment in the form of a voucher, multi-benefit card or salary on demand, for that, the professional needs to have days worked to receive.
HR Consultancy, for example, offers an application for employees to make a salary advance at any time and pay expenses that cannot wait for their payday.
The idea of both transactions is similar, but in practice, they are different operations.
In short, the anticipation of receivables is an opportunity for companies to fulfil all their financial responsibilities, with less bureaucracy, and using their own resources.
Although it seems advantageous, in order not to further damage the finances of the business, it is necessary to carry out detailed planning to understand the advantages and disadvantages of the operation at that time. Also, preventing the process from becoming common practice is essential to your company's financial health.
Now that you understand how the prepayment of receivables works, leave your comments on the topic here. Enjoy and visit the website of HR Consultancy to learn about the solutions we've created to help your company's financial health.
HR Consultant UK can help if you have any questions about What is a prepayment of receivables and how does it work?
. Our HR consultant in London can assist you if you live in London. Suppose you live further afield that's not an issue! Visit our HR Consultants Near Me page to find the best consultancy nearest to you.
See you next time!