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Account Receivable Factoring Companies

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Finally It's Time to Take a  New Look at  Accounts Receivable Financing

 account receivable factoring companies


There are  a lot of misperceptions  amongst CFOs and finance executives when it comes to asset-based lending. The  greatest is that asset-based lending is a financing option of last resort - one that only " hopeless" companies that can't  get a traditional bank loan or line of credit would  look at.


With the economic  decline and resulting credit crunch of the past few years, though, many companies that might have qualified for more traditional  kinds of bank financing  before have instead  relied on asset-based lending. And to their  shock, many have found asset-based lending to be a  versatile and cost-effective financing tool.


What Asset-Based Lending Looks Like


A  conventional asset-based lending  situation  frequently looks something like this: A business has  stayed alive the recession and financial crisis by aggressively managing receivables and inventory and  putting off replacement  capital investment.  Since the economy is in recovery (albeit a weak one), it needs to  build up working capital  to fund new receivables and inventory and fill new orders.


 However, the business no longer qualifies for traditional bank loans or lines of credit due to high leverage,  weakening collateral and/or  extreme losses. From the bank's  standpoint, the business is no longer creditworthy.


Even businesses with strong bank relationships can run afoul of loan covenants if they  experience short-term losses,  at times  requiring banks to  rescind on credit lines or  drop credit line increases. A couple of bad quarters doesn't  always indicate that a business  finds themselves in trouble, but  occasionally bankers' hands are tied and they're forced to make financing  moves they might not have a few years ago, before the credit crunch  switched the rules.

In  situations like this, asset-based lending can  offer  the needed  funds to  really help businesses  get through the storm. Companies with strong accounts receivable and a  strong base of creditworthy customers  often tend to be  the most ideal candidates for  accounts receivable financing  advances.


With  conventional bank loans, the banker is  mainly  worried about the borrower's projected cash flow, which will  supply the funds to repay the loan.  For this reason, bankers pay especially close attention to the borrower's balance sheet and income statement  so as to gauge future cash flow. Asset-based lenders,  however, are  mainly  worried about the performance of the assets being pledged as collateral, be they machinery, inventory or accounts receivable.


So before lending, asset-based lenders will  typically have machinery or equipment independently valued by an appraiser. For inventory-backed loans, they  commonly  demand regular reports on inventory levels,  together with liquidation valuations of the raw and finished inventory. And for loans backed by accounts receivable, they  generally perform  in-depth analyses of the eligibility of the collateral based on past due, concentrations and quality of the debtor base. But  compared with banks, they  typically do not place tenuous financial covenants on loans (e.g., a maximum debt-to-EBITDA ratio).


Asset-Based Lending: The Nuts and Bolts


Asset-based lending is  effectively an umbrella term that  includes several different  varieties of loans that are secured by the assets of the borrower. The two  main types of asset-based loans are factoring and accounts receivable (A/R) financing.


 Receivable Factoring is the outright purchase of a business' outstanding accounts receivable by a commercial finance company (or factor).  Normally, the factor will advance the business between 70 and 90 percent of the value of the receivable  at the moment of purchase; the balance, less the factoring fee, is released when the invoice is collected. The  invoice discounting fee typically ranges from 1.5-3 .0 percent, depending on such  things as the collection risk and how many days the funds are in use.


Under a  contract, the business can usually  decide on which invoices to sell to the  invoice factoring company.  As soon as it purchases an invoice, the  factoring company  deals with the receivable until it is paid. The  invoice factoring company will essentially become the business' defacto credit manager and A/R department, " completing credit checks, analyzing credit reports, and mailing and documenting invoices and payments.".


A/R financing,  on the other hand, is more like a  typical bank loan,   with some  chief differences.  Even though bank loans may be secured by  several kinds of collateral including equipment, real estate and/or the personal assets of the business owner, A/R financing is backed strictly by a pledge of the business' outstanding accounts receivable.


Under an A/R financing arrangement, a borrowing base is established at each draw, against which the business can borrow. A collateral management fee is charged against the outstanding amount, and when funds are advanced, interest is assessed only on the amount of money actually borrowed.

An invoice typically must be  under 90 days old in order to count toward the borrowing base. There are  usually other eligibility covenants  like cross-aged, concentration limits on any one customer, and government or international customers, depending on the lender. In some cases, the underlying business (i.e., the end customer) must be  viewed as creditworthy by the finance company if this customer  constitutes a majority of the collateral

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Increase Your Cash Flow Employing  Account Receivable Financing


  Compared with a bank loan, the factor  validation process can take  short of a week. The  secret to a  quick approval process is a  comprehensive and  precise  customer  history. You can  spare the factor hours, even days, when you are  forthright and hones about the  relevant information  asked for. You should give  specifics about your  customers and the age of their accounts.  Apart from a client profile, you may  have to  supply specifics  regarding your  business  for example, a  record of the  clients,  duration of time in business, monthly sales volume, and a  depiction of your operation.


 When  accepted, you can expect to negotiate terms and conditions with the factor. The  arrangement process takes  a variety of  parts of the  agreement into  things to consider.  Say, if you  wish to factor $10,000, you  just cannot  count on as  great a deal as a  business who  wants to factor $500,000.

 trucking factoring

 Through the negotiation process, you will become well aware of  precisely what it costs to factor your accounts receivable. Depending on the discount schedule you negotiate, a factor may  hold on to between 2-10 percent of the invoice's  stated value as a  charge. But, when weighed against the cost of lost business or  giving up you business  completely, the  value of the  cost associated with factoring diminishes  greatly.


After you  get an agreement with the receivable factoring company, the  finance  tires begin to  spin. The receivable factoring company  performs due diligence by  analyzing your customers' credit and any liens placed against your company. The factoring company also  validates the  authenticity of your invoice  right before  purchasing your receivables and advancing  funds to you.