Offering credit can be a powerful way for companies launching card programs to offer even greater value. After all, credit is becoming an increasingly demanded feature among consumers and small businesses. But a company can’t simply flip a switch and start offering credit overnight.
For credit programs to function, a robust framework of banking partnerships, lending licenses (sometimes by state!), and accounting processes must be in place. Rather than building this yourself (which might take years, along with dozens of hours and resources spent ensuring compliance), consider a process called receivable purchase funding.
So what is receivable purchase funding?
Luckily for Highnote customers, we – along with our sponsor bank partners – handle most of this process ourselves. This frees our customers to do what they do best, run their business. But to show our process and demystify what goes into receivable purchase funding, we’re breaking things down in a quick tutorial.
What is Receivable Purchase Funding?
Receivable purchase funding is a process that allows non-banks to offer credit. It establishes a partnership between a sponsor bank and the nonbank company (also known as the program owner) through the purchase and sale of receivables. By front-loading the credit risk using a sponsor bank, the program owner can offer their own credit using the lending licenses from the bank.
Let’s break this down even further.
A receivable is a loan. The receivable is sold by a bank and is purchased by a program manager.
The process requires a number of entities with specific roles:
The Program Owner: This would be you! In other words, this is the company that oversees the credit program and owns the relationship with its customers.
The Lender: This is a financial institution such as a private equity group or a hedge fund you might partner with to get the capital to purchase the receivables from the lender of record. If you already have the capital to fund your program, a line of credit lender is not required.
The Sponsor Bank: This is the lender of record responsible for originating the loan.
Let's consider an example from Highnote to see how this process unfolds:
Suppose a fleet management company offers a credit card for drivers to conveniently refuel on the road. As a Highnote customer, they have access to our full, standardized process, which starts with a product funding account, also known as a collateral account. The fleet management company will fund this account either by themselves or by using a line of credit they’ve received from the line of credit lender to meet the minimum required amount.
Highnote notifies the company of this minimum required amount each business day when funding is needed. Once the collateral account has the minimum required balance, transactions are authorized and cleared. This might include any transactions done by drivers stopping at refueling stations and charging the card issued to them by the fleet management company.
After a day or so, the sponsor bank settles with the network originating the loan as the lender of record. Thanks to Highnote's advanced ledger, the collateral account reflects the amount of receivables to be purchased by the fleet management company at a future date.
After that, the sponsor bank holds the receivables on its balance sheet for some time. The receivables are sold back to the fleet management company, and Highnote provides the company with a daily receivables sale statement indicating the purchase amount. Later on the same day, the sponsor bank withdraws cash from the collateral account.
This process repeats each business day, with the sponsor bank settling with the network and the company purchasing the receivables.
Highnote's unique approach to receivable purchase funding offers several differentiating benefits for companies.
Advanced Ledger: Highnote's advanced ledger streamlines financial transactions, providing transparency and enhancing overall process efficiency.
Real-time Tracking: Companies can track receivables in real time, ensuring better visibility and control over the funding process. Access to receivables sale statements simplifies reconciliation procedures.
Partnership with Banks: Highnote's close collaboration with banks enables companies to access funding for card programs without the need to lend money themselves, reducing risk and operational complexities.
By leveraging receivable purchase funding facilitated by Highnote and its partner banks, businesses can unlock the credit potential of their card programs. With an advanced ledger, real-time tracking, and strong partnerships, Highnote provides a powerful solution for companies aiming to enhance the value of their card programs in a competitive market.