Receivables Financing

In a purchase, or factoring, structure Wesvel buys eligible invoices at a discount and collects from the account debtor, the customer who owes the invoice; the seller’s credit matters less than the payer’s, and the facility can be with or without recourse to the seller for non-payment. In a loan structure the business borrows against a borrowing base of eligible receivables, retains title and collections, and repays as invoices are paid. The loan structure suits businesses with strong collections operations; the purchase structure suits those that want the receivable off the balance sheet or lack the credit for a loan.

Once a receivable is financed, the account debtor is sent a notice of assignment, a written instruction that payment on the invoice is now due to the lender’s lockbox and that payment to the seller no longer discharges the debt. A notification facility sends that notice on every invoice; a non-notification facility, used for sellers whose customer relationships would not tolerate it, relies on the seller collecting into a controlled account, and is priced and advanced against accordingly. Verification is the lender’s direct confirmation with the debtor, before funding and on a sample thereafter, that the goods were delivered or the service performed, the invoice accepted, and the amount and due date agreed. Recourse defines who bears a debtor’s failure to pay: in a recourse facility the seller repurchases or replaces the receivable, in a non-recourse facility the lender takes the debtor’s credit risk and underwrites and prices it. In both, the seller’s principals typically sign a validity guarantee, a personal undertaking that every invoice submitted is genuine and free of offsets, which does not guarantee collection but does make fraud a personal liability.

Not every invoice qualifies. Eligible receivables are typically due from creditworthy commercial payers, within an agreed age measured from invoice date, not disputed, not owed by an affiliate or related party, not subject to a contra account where the debtor is also a supplier and could offset what it owes against what it is owed, not a progress billing or a bill-and-hold, and not already pledged to another lender. Government receivables are ineligible unless the assignment has been perfected under the applicable federal or state assignment-of-claims procedure. A cross-aging rule removes every invoice from a debtor once more than an agreed share of that debtor’s balance is past due, on the logic that a customer who is not paying some invoices is a credit problem on all of them. The advance rate is the fraction of eligible receivables actually funded, set from the payers’ credit, historical dilution and collection speed; the remainder is the reserve, held back and released to the seller as invoices pay. A diversified pool of investment-grade payers supports a higher advance than a concentrated pool of small ones. The gap between face value and advance is the lender’s cushion.

The two ways a receivables facility loses money are invoices that were never real and invoices that are paid short. Verification, confirming with the payer that the goods were delivered and the invoice accepted, addresses the first. Dilution, the credits, returns, disputes, early-payment discounts and write-offs that reduce what is finally collected against gross invoices, addresses the second; it is measured from the seller’s history through a receivables roll-forward, and a dilution reserve sized to that history is deducted from the borrowing base. Both are monitored through the life of the facility, not only at onboarding, and a rise in dilution or a fall in verification response is treated as a credit event.

A receivables lender owns nothing it has not perfected. Before funding, a lien search is run against the seller in every jurisdiction where it is organized or does business: UCC filings, federal and state tax liens, judgments and pending litigation. Any existing financing statement over receivables is either terminated by the prior lender against a payoff letter, with a UCC-3 termination filed, or made subject to an intercreditor or subordination agreement that puts the prior lender behind Wesvel on receivables and their proceeds. Wesvel then files a UCC-1 financing statement with the secretary of state of the seller’s jurisdiction, naming the debtor exactly as its organizational documents do and describing the collateral, so that its security interest is perfected and first in priority under the first-to-file rule. Financing statements lapse after five years unless a continuation statement is filed in the final six months of that period, and the servicing calendar tracks every one. The same search, repeated through the term, is how stacking is caught: a new financing statement, or a new daily debit in the bank data, means another lender has taken a position on the same receivables.

Where the seller is paid by card or through a payment processor, Wesvel takes read-only access to the processor account and to the operating bank account through the seller’s own permission, and reads settlement data daily rather than statements monthly. That data shows the true book: what was actually settled against what was invoiced, chargeback and refund rates, which customers pay on time and which pay short, and the seasonality of collections. It reconciles the receivables aging to cash, exposes invoices that never turn into deposits, and shows the debits of any other funder taking a share of the same revenue. Where the processor supports it, collections are split at the processor so that the lender’s share is settled to the lockbox before the remainder reaches the seller.

A pool dominated by one payer is a loan to that payer. Concentration limits cap the share of the borrowing base any single account debtor can represent, and receivables above the cap are ineligible. Collections are directed to a lockbox, a post office box and bank account that the lender controls, so that cash flows to the lender first and is applied to the facility before any surplus is released. Where collections arrive in the seller’s own account, that account is placed under a deposit account control agreement, a three-party agreement in which the bank agrees to follow the lender’s instructions on the account, which is what gives the lender control of the deposit account and perfects its interest in the cash. Dominion may be springing, where the seller keeps operating the account until a trigger event and the lender then takes over, or full, where every dollar sweeps to the lender daily from the start. Which applies is set by the seller’s credit and written into the documents.