Meaning
Percentage of the face value of an invoice that a lender is willing to provide as an immediate cash loan. Determining the receivables advance rate involves an assessment of the customer creditworthiness and the historical dilution of the invoices. Most lenders offer between seventy and ninety percent of the total amount.
Liquidity Provision
Immediate access to cash allows a manufacturer to pay suppliers and workers before the customer pays the invoice. A high receivables advance rate provides more working capital to the business but increases the risk for the lender. The remaining balance is held in reserve until the invoice is paid in full.
Risk Mitigation
Lenders adjust this percentage based on the likelihood of the debt being paid. If a manufacturer has a history of high product returns, the receivables advance rate will be lowered to protect the lender from losses. This ensures that the loan is always over collateralized.
Operational Scaling
Growth in production volume is often funded through these asset based lending facilities. As the company issues more invoices, the amount of cash available through the receivables advance rate grows automatically. This provides a flexible source of funding that scales with the business.
