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While portfolio factoring and receivable securitization are both corporate funding constructs based on the true sale of a company's trade accounts receivable, there are also significant differences between the two products. Unfortunately, many receivable finance practitioners have only a vague idea on how the other's product actually works. This article is intended as a primer to help bridge the gap.
It has been almost 30years now since the first securitizations of trade accounts receivable were structured and placed with investors in the U S. financial markets. Since that time, these financings have grown to constitute an important part of the capital structure of many large, well-known companies around the world. At the same time, it is clear to us at Finacity from the types of questions we routinely field at trade conferences and industry events that this important corporate funding mechanism remains at best only vaguely understood by many otherwise sophisticated CFOs and treasurers in corporate America. When pressed, finance professionals at companies large and small often speak of it as no more than a variant of factoring. However, while there are indeed some superficial similarities between receivables securitization and portfolio factoring, there are also quite a few very basic and important differences. Given the pervasive confusion that exists, this author's goal herein is to try to demystify the subject of receivable securitization by, among other things, comparing and contrasting it with the more traditional factoring products with which many TSL readers may be more familiar.
Non-Recourse sale of receivables/ balance sheet treatment
Like portfolio factoring, a receivable securitization is predicated on the legal true sale of a company's trade accounts receivable to a third-party funding source. However, while a factoring of receivables may be accomplished either with or without recourse to the corporate seller, securitization is always done on a non-recourse basis. Both factoring and securitization thus stand in contrast to an asset-based lending or borrowing-base approach in which funds are advanced as a loan against the collateral value of accounts receivables (and often other corporate assets), rather than as proceeds of an actual sale of the receivables, and thus such ABLs always provide full recourse to the underlying company.
An important distinction to make at this point is that the legal...