Sale of Future Receivables – An Alternative Financing Solution for the Delivery Phase

Capital goods contracts with long production and delivery periods often stipulate back-ended payment terms. For suppliers, this creates a cash flow shortfall, as significant costs for engineering, materials, and production are incurred long before payment is received. By selling future receivables to a special purpose vehicle (SPV), suppliers can bridge this funding gap efficiently – without adding new debt to their balance sheet. This financing solution provides early liquidity, strengthens financial ratios, and ensures the pre-financing of the delivery contract.

Significant negative Cash Flow during Production Phase

In many long-term supply agreements for capital goods, the buyer is required to pay most of the contractual purchase price only after delivery, acceptance, or commissioning. Apart from an initial advance payment, no further inflows occur during the production phase.

This creates a considerable financing problem for the supplier. While the production and delivery phase often lasts months or even years, high expenses for engineering, material procurement and manufacturing are incurred at an early stage. This results in negative cash flow for the supplier over the entire project period, as expenses are incurred periodically throughout the production and delivery phase, but payments are often only received upon formal acceptance of the delivered goods. This discrepancy between cash outflow and cash inflow ties up considerable liquidity resources and increases the need for external financing.

Structure of the alternative Financing Solution

A legally and economically viable solution is to sell future receivables from the supply contract to an SPV. Through the assignment and sale of future receivables that have not yet arisen at the time of assignment and sale, but whose amount and date of origin can be clearly determined, these future receivables are transferred to an SPV.

By purchasing the future receivables, the SPV immediately acquires the creditor’s rights against the buyer. In return, the supplier receives liquidity already during the production and delivery phase. The SPV finances the purchase of the receivables through a bank loan, which is repaid upon maturity from the buyer’s payments.

Key Benefits for the Supplier

This financing structure offers suppliers a range of advantages:

• Bridging of negative cash flow: liquidity from sale of future receivables covers project costs despite back-ended payments from customer/buyer
• Balance sheet and liquidity relief: funding without additional bank debt, existing credit lines remain unaffected, improving key financial ratios
• Diversification: broadens the financing mix beyond traditional debt instruments
• Risk transfer: payment risk of customer is transferred to the SPV/SPV investor(s)
• Customer focus: buyer benefits from unchanged back-ended payment terms

Basic Requirements for such alternative Financing Solution

The main prerequisites for such financing solution are as follows:

1. Contractual
   • Legally valid claims: future receivables must be determinable and clearly assignable to the underlying supply contract
   • No restrictions on assignment of claims in the delivery contract
   • Transparent and well-defined payment terms (amount, due date)

2. Economic
   • Buyer’s creditworthiness: buyer’s credit quality is crucial, as they are ultimately responsible for settling the claims (“first-class buyer”)
   • Adequate financial standing and contractual performance capacity of the supplier
   • Suitable contract size, since the structure is more efficient for larger order volumes (economies of scale)

3. Operational
   • Reliable documentation of delivery, completion, or acceptance to trigger receivable creation
   • Close cooperation between supplier, SPV, bank(s), and buyer

Conclusion

Selling future receivables offers a flexible and effective way to finance projects with back-ended payment terms. Suppliers can execute large-scale delivery contracts without liquidity shortage and optimise their balance sheet structure at the same time. AIL brings hands-on experience in structuring and executing such solutions, which have been successfully implemented in different project settings.