Installment contracts don’t have to stall cash

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Who knew hard-to-collect debts could be converted to cash easily? Last week, we introduced the concept of accounts receivable financing, a scheme that’s increasingly becoming popular among growing businesses.

By way of review, accounts receivables financing allows a company to get back working capital stuck in collectibles, by passing them on to a financing firm that acquires the receivables at a reduced amount.

We explored a popular type of receivables financing, receivables factoring. In this scheme, a company notifies a client that it has a receivables factoring arrangement with a financing firm. The financing firm then verifies these receivables and collects these directly.

An example is a company that provides manpower to a large corporation, which has a “payment habit” of 60 days. To cover the workers’ monthly salaries, a financing firm may advance the wages to the manpower service provider, and collect the receivables after 60 days. No collateral is required, save for the receivables.


There’s another type of receivables financing, called installment paper purchase.

BDO Leasing and Finance Inc., one of the country’s top receivables financing firms, has been helping businesses raise cash through the sale of their existing installment sales contracts, says Roberto Lapid, vice chairman and president.

“Installment paper purchases leverage on installment sales,” Lapid explains.

For example, a company buys a truck on a three-year installment contract from a vendor, who does it through an in-house financing scheme. “What we do is we buy the receivable at a discount,” he says.

Advantages of installment paper purchase
Lapid cites three benefits of installment paper purchases for businesses.

First, it converts tied-up capital into instant cash, which can then be used again in running the business.

Second, installment paper purchases are in effect an additional credit line, thereby preserving existing credit lines (as well as cash) for operations.

Third, there are tax savings. Companies may deduct interest expense from taxable income, thus reducing tax payments.

BDO Leasing, however, does not just deal with any company that wants to unload its receivables.

“We look at their contracts. It’s not just the matter of buying the receivables. At the end of the day how creditworthy is this debtor? We do a credit investigation,” Lapid says.

Commercial vehicles, real estate
Lapid acknowledges the very high risks involved in this kind of financing arrangement. “So we only go for installment contacts that are really revenue-generating,” he says.

Such contracts usually involve installment purchases of large commercial vehicles like buses, trucks and petroleum haulers.

“Buses now would cost from P5 million to P8 million each, and if you’re a bus operator it’s very impossible for you to buy in cash. Otherwise, you have to put up a huge paid-up capital. So they will go to the dealer and buy it on installment basis for the next three years,” Lapid explains.

“Like any other business, the bus supplier does not have so much cash. They have to import because they have to stock up. If their cash is stuck in receivables, it will disrupt the business.”

At what point does receivables financing come in?

“Sometimes at the beginning, sometimes when the vendor’s buyers have paid 30 percent. It depends on the vendor, and depends on the type of industry,” says the BDO Leasing chief.

BDO Leasing can also buy real estate installments at a discount.

“For real estate, we can do an installment paper purchase provided 30 percent has been paid. There’s less risk because the buyer has paid substantially,” Lapid explains.

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