Understanding Asset Based Lending ABL. Asset Based Lending and Factoring: How to Use Your Assets to Grow Your Business. Since the onset of the recession and accompanying credit crisis in 2008, businesses large and small have found it more difficult to obtain financing. One sector of the financial services industry that did not restrict the flow of capital to businesses during the downturn, and continues to lend to businesses today is the asset-based lending and factoring industries.
What allowed asset-based lenders and factors to continue to provide funding, serving as a crucial lifeline to U.S. businesses of all types and sizes, when traditional sources of commercial financing dried up, was ABL and factoring’s unique focus on the assets of borrowers. Many of the businesses may not be aware that their assets – accounts receivable, inventory, plant & equipment, even intellectual property – could be their ticket to affordable, flexible and stable credit that they can use for working capital or to grow their businesses and hire employees.
Bank of American Business Capital, one of the leading asset-based lenders in the U.S. describes the distinction between ABL and traditional commercial bank financing :
The primary difference between asset-based lending and commercial bank financing is what the lender looks to first for repayment of a loan. A bank will look first to the cash flow for the repayment, then to collateral. An asset-based lender looks to collateral first. Since banks underwrite cash flow as their primary repayment source, they typically require fewer collateral controls and monitoring but more financial covenants.
For “asset rich” companies, an asset-based loan may make more funds available because it is not based strictly on the anticipated levels of cash flow. Additionally, the structure often requires fewer covenants, providing more flexibility for many borrowers.
Lenders who provide asset-based credit facilities will work closely with the borrower, monitoring the collateral and working with the client when challenges arise. Clients of asset-based lenders and factors will frequently attest to the flexibility offered by their lenders.
ABL and factoring have evolved over the years. Once saddled with the reputation of being “lenders of last resort” who charged exorbitant rates and fees, ABL and factoring are now mainstream lending options preferred by many companies in need of critical growth and working capital. In recent years, companies such as Tyson Chicken, Hertz, Sears, Supervalu, US Food, United Rentals, and many other businesses have opted to take advantage of the benefits of an asset-based credit facility to meet their strategic financing needs.
Businesses of all types and sizes that have assets and are in need of financing should seriously consider exploring asset-based lending and factoring.
Following is a wealth of information on five key areas of ABL and factoring.
Asset-Based Lending and Middle-Market Businesses: Perfect Together
By Apple Capital Group
The middle market businesses should consider asset based lending to take advantage of opportunities created by the long recession and fitful economic recovery.
For example, a company might learn that a key competitor, battered by the recession, is now in the market for a buyer and ready to make a deal. For another example, a retail business experiencing a flurry of consumer interest might need to boost inventory, but can’t be sure current sales levels will continue and as such is reluctant to make a major investment.
In short, opportunity abounds, but at a time when middle-market businesses with room to expand might be stymied by lack of capital, less than stellar credit or simply no time to work through the more traditional financing options. Understanding Asset Based Lending ABL
For these companies, financing through asset-based lending might be the ideal alternative to traditional and commercial borrowing. In simplest terms, asset-based lending is financing secured by an asset. In exchange for money, borrowers offer equipment, inventory, real estate, accounts receivable and other liquid assets. Recently, lenders are considering new asset classes not previously used in the traditional asset-based lending structure, such as brand or trade name. Lenders maximize the collaterals’ lendable value, focusing more on that than leverage. Understanding Asset Based Lending ABL
Asset-based lending is an attractive option during volatile and uncertain economic times. When the economy is lagging, businesses’ balance sheets tend to decline slower than the revenue rate. When the economy is growing, asset-based lending helps businesses deal with cash flow that lags behind revenue growth. Overall, asset-based lending gives middle-market companies flexibility and access to capital not available with traditional or commercial financing. Understanding Asset Based Lending ABL
In 2011, refinancing pushed asset-based lending issuances to record highs, according to the Asset-Based Lending Loan Market Update published by KeyBanc Capital Markets. To date, 2012 asset-based lending appears to be running at more typical rates. The Loan Market Update indicates that 2012 started slow, but gained momentum several weeks into the quarter. Even so, the first-quarter volume of $19.1 billion was 33.6 percent lower than the first quarter 2011.
Apple Capital Group is seeing considerable interest in asset-based lending from businesses in the retail, general manufacturing and transportation and logistics sectors from across the bank’s footprint. Apple Capital Group expects to double its asset based lending business in 2012 by committing even more resources to asset-based financing.
The need for asset-based lending is primarily driven by companies’ balance-sheet leverage and cash-flow characteristics. Successful asset based lending borrowers typically have high leverage, tight cash flow and strong working capital assets in the form of robust accounts receivables and inventory. Asset based lending has an application when companies are experiencing rapid growth, making acquisitions, needs to finance dividends, requires recapitalization or is involved in a restructuring and turnarounds.
Asset-based lending is a good fit for many businesses in a variety of sectors and industries, but asset-based lending is a particularly good fit for industries and sectors that have a high reliance on working capital assets. For example, manufacturing, distribution, wholesale, retail and service businesses are all good candidates for asset-based lending. Businesses that have a seasonal business cycle often find asset-based lending a good solution for capital challenges that crop up because the business requires inventory investments in one quarter, with no return on that investment until the second quarter. Understanding Asset Based Lending ABL
The asset-based lending process should start with the borrower finding the right lender for the purpose. Businesses contemplating asset-based lending should consider the following characteristics when evaluating lenders:
- Does the lender have detailed knowledge of the borrowers’ industry so they can provide a realistic assessment of the business’ assets and needs?
- Does the lender have a seasoned loan portfolio managed by experienced bankers?
- Does the lender have the ability to advocate to the business and provide support through good times and bad?
Prospective lenders will evaluate the business’ needs and recommend the appropriate financing product. For example, secured revolving credit facilities are an appropriate choice for a business that supplies seasonal products and so needs to finance inventory, while short-term over-advance facilities might be a better choice for a company that has just gotten new business and needs funds to service that new business. Understanding Asset Based Lending ABL
At Apple Capital Group, loan sizes range from $5 million to $50 million, and the bank has the ability to arrange and syndicate much larger loans. While asset-based loan rates once were typically significantly higher than traditional bank loans, increasingly lenders offer a wider range of possible rates. Rates are based on prime rate or LIBOR, and vary depending on the borrowers’ balance sheet, the borrowers’ industry and the liquidity of the recourse asset. Generally speaking, the more liquid the asset put up as collateral, the lower the rate.
Businesses that anticipate using asset-based lending should evaluate the internal reporting systems to ensure they maximize their borrowing capacity. Asset-based lending matches a company’s collateral pool to the company’s loan balance and to the company’s financial statements. These interrelated factors are monitored through monthly reports that are required as part of the lending process. Generally speaking, businesses with lower liquidity should anticipate more monitoring so lenders can be sure that the business is obtaining as much credit as possible. Understanding Asset Based Lending ABL
Once the purview of companies that could not attract other forms of capital – equity or debt – asset-based lending is now considered a sophisticated product that should be part of every business’ financing strategy. Asset-based lending is valued by borrowers due to its lower cost, high flexibility and consistency, despite economic factors.
Getting the Cash Flow You Need to Grow Your Business
By: Cole Harmonson, President and CEO of Far West Capital
Are you ready to grow your business, but something is getting in your way? Do you need to increase your cash flow in order to grow your business? Are you profitable, but banks still won’t loan you money? Have you been told by a lender that your business is too small and you haven’t been in business long enough to obtain a loan? Did you just land a huge customer, but their payment terms won’t allow you to make payroll, if you increase your staff? These are some of the obstacles entrepreneurs encounter. When bank loans, angel investing and venture capitalists are not viable options, factoring is a beneficial solution for your company. Factoring can have a big impact on your company, especially when your company continues to grow quickly, lands a big business opportunity, or faces an obstacle beyond its control. Understanding Asset Based Lending ABL
Entrepreneurs are usually hesitant and skeptical about factoring, and it is rightly so. Growing your business takes big risks, ones that could have positive or negative consequences. It takes entrepreneurs a great amount of time, effort, and faith to research resources to help their business and with a plethora of tasks to complete and things to keep in mind, entrepreneurs dismiss factoring companies because of quick misconceptions they hear. Some misconceptions include the following:
Misconception: To factor, I would have to give my company away.
Truth: Unlike equity financing options, factoring gives entrepreneurs more flexibility and more control. Factoring companies do not buy part of your company, tell you how to run your business or require a seat on your board of directors. You own and run your company. A factoring company provides you the finances to do it. Understanding Asset Based Lending ABL
Misconception: Factoring is a complicated process.
Truth: Anything can be complicated if you make it. When the process is explained step by step, it is easier to understand. A factoring company should discuss your company history and its progress with you. The factoring company should also analyze your company’s options and decide if factoring will actually give you additional profits. If factoring is a fit, paperwork is filled out and collected. Typically, the process from the first conversation to funding can take anywhere from a week to three weeks, depending on the speed of gathering your documents. After you receive the funding and depending on the type of factoring, your clients make payments to the factoring company. Understanding Asset Based Lending ABL
Misconception: Factoring costs too much.
Truth: Factoring should be a customized solution for each company. That said, there is not a set rate. Some factoring deals can come close to bank rates and some factoring deals can have zero fees. In other words, sometimes we charge interest only. The cost depends on the factoring deal. In general, factoring does cost more than the typical bank loan but is designed to increase your profitability. If it does not increase your profitability, a factoring company should not sign you up. Understanding Asset Based Lending ABL
Misconception: Factoring companies will disrupt my relationship with my clients.
Truth: Again, factoring should be a customized solution for each company, so the relationship between factoring company and the company’s clients will vary. Depending on the factoring deal, the factoring company may have direct contact with clients. In other situations, the factoring company may have no contact with clients. The point is, a factoring company’s job is to help you get more business, not disrupt your success. Factoring companies should work hard to customize the treatment of your valuable customers one at a time. Understanding Asset Based Lending ABL
The best way to learn about factoring misconceptions is to take the time to talk to a knowledgeable factoring company. Learn about your financing options fully before you make a decision.
Your Financing Options
When it comes to your financing options, factoring companies have a couple of options to help your company grow. These include accounts receivable financing, asset-based lending and purchase order financing. Understanding Asset Based Lending ABL
Accounts Receivable Financing
This type of financing allows a company to sell its outstanding invoices or receivables to a factoring company in exchange for working capital for the business. After a period of time, the company pays the amount of the outstanding invoices to the factoring company. This process helps increase cash flow.
For example, take the instance of one of our clients. Our client was in a great position. Her company had recently landed a new, nationally known customer. She added employees to accommodate the new customer and her company was growing successfully. Then, her customer changed the vendor payment policy, which altered the pay cycle. Our client now needed more cash flow to accommodate the new pay cycle and it gave her literally days to find a way to pay her employees on time. Her bank was not able to provide a financing solution. She was also on a deadline to make payroll in three days! By factoring her accounts receivables to a factoring company, our client was able to receive working capital in time, solving the payroll obstacle and being able to fulfill the company’s duties to her customer. Since then, she has worked with us multiple times to finance her company. Today, the company continues to be incredibly successful. Understanding Asset Based Lending ABL
This type of lending is different from factoring in that your business does not present invoices one by one for funding, you present your entire pool of short term assets, including accounts and inventory. This type of lending can be viewed as a step between factoring and bank lending and is meant for a company with an established track record but that is not quite in a place where traditional lending satisfies their need for capital.
Purchase Order or Inventory Financing
Purchase order and inventory financing is usually not a stand-alone financing option. When companies have a solid purchase order to fulfill but do not have immediate cash flow to pay its suppliers, this type of financing provides companies with working capital to pay its suppliers to fulfill the order. Understanding Asset Based Lending ABL
When our long-standing client approached us with their plans for developing a new model of their rugged tablet PC, we looked at their past products and order history to analyze the anticipated demand when the new product would be produced and placed on the market. We were able to provide our client with the funding it needed to manufacture the tablet PCs and meet the demand of its purchase orders. This allowed the company the cash flow and flexibility it needed to grow its business.
What You Deserve
You deserve to grow your business, and you can! There are dedicated and qualified financing companies that will take the time to teach you about your financing options, give you a customized solution and help you reach your business goals. When you are researching factoring companies, be sure to look for the following:
1. Find an experienced and qualified team who has been in your shoes as an entrepreneur and who knows the ins and outs of factoring and financing options. The company should be focused on your goals, able to answer all your questions and helpful in easing away your reservations about factoring. The factoring company should also make sure factoring is the best option for you and your company’s future. Understanding Asset Based Lending ABL
2. Find a company with excellent customer service. You deserve courtesy regardless of the size of your nest and to be treated the way you want to be treated. You deserve to talk to an actual person who will give you the time you need when you call. You are paying a premium for financing, so you should feel good about the way in which you are treated.
3. Find a company that is in tune with your business goals and dedicated to helping you reach those goals. When growing your company is your goal, you need a factoring company who is ready and enthusiastic about helping you do it. We also recognize that you need more than just capital to succeed. A factoring company’s connections in business become your resources for success. Asset Based Lending
Don’t let any obstacle keep you from reaching your goals or growing your business. There are factoring companies that will make sure what they offer is a fit for what your company needs and not just another factoring deal. Asset Based Lending
Entrepreneurial Asset-Based Lending (ABL) By: Neville Grusd, CPA
President, Merchant Financial Corporation
What is ABL
ABL is an alternative form of financing utilizing the company’s assets as collateral. Usually the term applies to working capital financing, i.e. availability to borrow is based on receivables and inventory. Long-term assets, such as equipment and real estate, are usually financed through separate term loans.
ABL is a valuable tool when bank lines are not available to the borrower, or are insufficient for its needs. ABL works particularly well for growing companies, giving them the ability to maximize all available opportunities. Asset Based Lending
How does ABL work?
ABL financing is set up a revolving credit line, with a cap.
The amount available to borrow is based on percentages of eligible account receivables and eligible inventory.
The borrower can draw down funds as needed, subject to the availability formula.
Accounts Receivables (A/R)
The typical advance rate on A/R is 80%. The rate can vary depending upon historic and expected dilution of receivables. “Dilution” is calculated based on returns, allowances and deductions from sales, i.e. the reduction of gross sales to net sales. The advance rate of 80% is usually used when the dilution rate is around 5%. With very low dilution rates, an advance rate of 85% is not uncommon. If customer discounts are netted out off the invoiced amount; then they would not be included in the dilution calculation. Asset Based Lending
It is important that receivables relate to goods delivered and services already rendered in terms of unambiguous purchase orders. If billings are based on long-term contracts or progress billing, it is advisable to obtain customer sign-offs and submit these with the invoices.
“Eligible” receivables are defined as those not older than an agreed period (usually 90 days from invoice date when there are 30 day terms) and those deemed credit-worthy by the lender. If extended terms are offered to credit-worthy customers, then the eligibility period may also be extended. Asset Based Lending
It is also typical that “cross-aging” may be applied in computing availability. Where more than an agreed percentage, say, 25% of an account has aged out beyond the eligibility period, then the entire account may be excluded. In some cases, concentration reserves on A/R may be set up in the lender’s discretion, i.e. where an account is more than, say, 10% of total A/R. Whether or not a lender enforces this is negotiable, depending upon who the customer is and the lender’s ability to confirm outstanding balances. Asset Based Lending
The typical advance rate on inventory is 50% of cost. “Eligible” inventory usually comprises finished goods on hand, but could include raw materials. WIP, in-transit inventory, and inventory held for more than a specified period is usually excluded. The majority of considerations as to whether lenders will advance on inventory are the types of inventory; the extent to which it is pre-sold; historic inventory turn; the age of the inventory; and whether a reliable perpetual inventory system exists. In some cases lenders may require appraisals to establish the advance rate. Asset Based Lending
Where inventory is included in the advance formula there is usually a sub-limit cap and/or such lending is restricted to a percentage of total borrowings or the A/R availability.
The best way for borrowers and lenders to ensure that the credit line and advance formulas being put in place are acceptable to both parties is for the borrower to prepare a detailed projection.
This should be for one year; comprising monthly income statements, cash flows, balance sheets, and an availability calculation. The latter will show the monthly borrowing needs compared with the availability based on the suggested advance formulas on A/R and inventory.
If in any month the borrowing needs exceed the availability, then this “over-advance” must be addressed. Either additional collateral must be provided, or the business plan must change to fit the formula, or the lender may agree to fund this. It is critical that such situations be considered and settled before they occur to avoid a crisis. Asset Based Lending
It is also important to note that most projections reflect month-end figures only, whereas the borrowing availability is usually computed daily. It is possible that “intra-month peaks” may occur and these should be computed, especially during peak periods, and any possible over-advances arising therefrom should be discussed as part of the lending arrangement.
Requirements for ABL Asset Based Lending
(a) The lender will require a first lien on at least the assets on which advances are being made. If there are existing liens, they must either be satisfied or subordinated to the lender.
(b) A/R collections flow into the lender’s lockbox account. Borrower will request advances for funds as needed, which could be daily. Accordingly, this is a revolving credit facility and interest is only paid on funds in use. Asset Based Lending
Usually customers are notified that payments must be made to the lender’s lockbox. In some cases, where the borrower is a strong company and there is sensitivity about customers being aware that the receivables are being collateralized, the lender may waive the notification requirement. In this case, customers would be directed to make payments into the lockbox account without disclosing the lender’s name.
(c) From time to time, the lender will confirm outstanding balances with customers. If there is sensitivity regarding the financing arrangement, then confirmations could be done as “an internal audit” procedure.
(d) For inventory lending, the lender will require a period Inventory Designation detailing the eligible collateral. The frequency of such reporting depends on the amount of reliance on inventory as collateral.
(e) Depending on the size of the credit line, usually annual reviewed financial statements and half-year compilations from an acceptable accountant are required. Quarterly or monthly internal statements may also be required.
For smaller credit lines, tax returns may be acceptable. However, the stronger the financial reporting, the better the credit line and the more favorable the terms will be to the borrower.
(f) ABL Asset Based Lending lenders require far fewer covenants than banks. Usually only Tangible Net Worth (which also includes subordinated debt) (TNW) and/or working capital covenants are specified. As long as these are met, shareholders are not restricted as to what they can withdraw from the business. ABL Asset Based Lending lenders are far less restrictive than banks in the amount of TNW covenants with regard to leverage, and 5 to 1 or more is not uncommon.
(g) Personal guarantees of the owners of the company are usually required, backed by
Personal Financial Statements. ABL lenders want the owners to stand behind the company. This allows them to be more aggressive, knowing that the owners will be assisting to solve problems and liquidate assets, if it becomes necessary.
Asset Based Lending Rates and charges vary among lenders depending upon the size, quality and financial condition of the borrower. For larger credit lines (in excess of $1 million) there is usually an annual credit line fee and interest at a rate above the prime rate. Some lenders may also charge a collateral administration fee, clearance days and legal expenses. It is advisable for the borrower to request a written proposal detailing all costs so that an “all- in cost of borrowing” can be computed.
ABL rates will exceed bank rates, but as the facility will provide more financing and/or more timely financing than a bank would offer, the facility should more than pay for the difference.
Advantages of ABL Asset Based Lending
(a) Entrepreneurial asset-based lenders are more flexible and non-bureaucratic than banks. They react quickly and make business-like decisions to ensure that borrowers can obtain the funds they need, when they need them. Because of constant communication the relationship develops quickly and the lender becomes a true “business partner” of the borrower.
(b) ABL lenders do not blow hot and cold, and support borrowers who perform throughout the business cycles. It is a fact that ABL lending increased during the current financial crisis.
(c) As the business grows, the credit line will grow automatically, and no clean-ups are required. Asset Based Lending
(d) While it may appear that there is additional work in administering an ABL line, everything the lender requires should be readily available in a well-run business.
(e) By funds flowing into a lockbox, the loan account is automatically paid down daily thereby minimizing interest costs. This arrangement permits the borrower to operate close to a zero-balance checking account.
(f) It has been argued that notification of customers by lenders is detrimental to the business. However, it has been found that customers pay faster when they know payment is being made to a financial institution, for fear that late payments will impair their credit- ratings. Asset Based Lending
(g) ABL Asset Based Lending works well with all types of businesses, including service companies such as security guards, staffing agencies, IT consultants, trucking, etc.
(h) ABL lenders are forward-looking. They are more interested in future prospects, growth opportunities and management, than purely historical information. They do not “drive the car looking in the rear-view mirror”.
Purchase Order Financing: An Effective Alternative
By RMP Trade Credit
Purchase order financing provides an invaluable resource to manufacturers, distributors, and wholesalers needing funding to produce and distribute goods to their customers. Purchase order trade finance companies offer a product to fund the production of goods to customers throughout the world. Companies who use purchase order financing find it to be a cost-effective alternative to maintaining inventory and the value-added services which purchase order finance provides prove to be a great asset in navigating the supply chain process from pre-production to delivery. Asset Based Lending
In one scenario, a supplier, vendor, importer/exporter, distributor, or reseller has received a large unexpected order from their customer. To be sure, this is often a very exciting and gratifying experience for any company. Now the company must plan the production of goods to be able to deliver, as promised, to its customer. The purchase order finance company is usually contacted just before or just after the closing of a big deal like the one mentioned above. Company management works with clients to ensure that the process runs smoothly, that the factory will meet its deadlines, and that the goods will arrive in good and working condition to the customer.
Asset Based Lending The process itself is simple:
1) The customer submits a purchase order to our client
2) The client then submits the purchase order to the purchase order finance company for review and approval
3) The purchase order finance company issues either a Letter of Credit or, if a deposit is made by the client, Payment Against Documents
4) The manufacturer completes the order and the goods are inspected to ensure that they meet the standards of the customer’s request
5) The goods are then shipped through a trusted freight carrier to the customer, after which an invoice is generated
6) At this point the bank, factoring company, lender, or other source of funds pays the purchase order finance company for the money advanced and they follow the invoice to collection.
With the increased shift to Just-In-Time inventory systems, purchase order financing can play an important role in fulfilling orders quickly and cost effectively. The confidence in having a trusted financial partner on call to fulfill orders allows companies to use their valuable cash resources elsewhere in the business, rather than using those cash resources to stock, maintain and track inventory until it sells. Inventory can drain cash from a company and, if that inventory does not turn efficiently, the company may be forced to sell the inventory at liquidation – thereby reducing margins substantially, if not outright trading money given the costs of production, maintenance, and the liquidation itself. The space previously used for the warehousing of goods can be repurposed into office or retail space or the company can move into a more scalable facility which reduces overhead costs and instead of employing resources to maintain the inventory, a company can focus its efforts on boosting sales and maintaining customer relationships. Purchase order financing can alleviate these issues for a fraction of the cost of maintaining inventory, allowing a company to run a leaner, nimble organization focused on its customer.
Asset Based Lending employs professionals with over 20-years’ experience in manufacturing and distribution, both internationally and domestically. In each transaction and client relationship, a dedicated account cxecutive is active from the initial stages through the delivery. This brings valuable expertise to the process and gives the client assurance that the process moves along without issue. Additionally, RMP Trade Credit uses a worldwide network of goods inspectors, freight forwarders, and customs brokers which ensure that no unexpected problems occur and that the customer will receive their goods in working condition, on time. For many companies, this relieves a large burden from the process and allows them to work on the next sale, rather than worrying about the supply chain process. By doing this, RMP Trade Credit creates a win for all parties involved. The customer receives the goods as promised, the client is able to deliver on their promises, and Apple Capital Group ensures that it is repaid for money advanced for the production of goods. Through this global teamwork driven approach, clients have discovered how Apple Capital Group’s Purchase Order Financing product can become their trusted partner in the supply chain process.
Apple Capital Group handles transactions from $50,000 to $5,000,000 and for periods of 30 to 120 days. The process to set up a transaction is a quick process:
1) The client submits an application with additional required information
2) Documents are issued to the client
3) Purchase Orders are submitted
4) The purchase order finance company works with all parties involved to setup the transaction and advance the funds needed for production
Often, this process can be completed in 2-3 days or less. In this way, Apple Capital Group provides a reliable resource which can respond quickly to its Client’s needs. It’s this dedication and commitment to delivery which sets RMP Trade Credit apart. We are a part of the Commercial Finance Association and International Factoring Association, which provides a level of confidence in Apple Capital Group’s business ethics and standards.
To learn more about this process, please reach out to us and complete a no-fee application. Our dedicated professionals can walk you through the process, the timing, and the costs of funds. Hopefully after your discussion, you will see that purchase order trade finance can be a valuable ad hoc financing source or a source of funds which you employ on a regular basis to fulfill purchase orders quickly and to reduce the costs of maintaining inventory.
Keeping the economy moving:
How asset-based lending and factoring improves cash flow for the transportation industry
By Bryan Alsobrooks, senior vice president and director of the Crestmark Transportation
The transportation industry is vital to keeping the United States economy moving…when trucks are moving, so is the supply chain of goods. Operating in the transportation sector presents a variety of challenges, and one of the key concerns is whether companies are able to generate sufficient cash flow to pay the bills. Whether you’re a small owner/operator or a large trucking company, waiting 45, 60 or even 90 days for clients to pay invoices can make it extremely difficult to come up with the money needed for day-to-day operations. Expenses, such as payroll, fuel, loan payments and repairs need to be dealt with in a timely fashion, and when customers aren’t immediately paying, liquidity is a challenge. In these situations, some small fleet owners ignore the overhead and fixed expenses that are required to keep the trucks running. Ongoing expenses like these never cease, and this can create a lot of frustration when there are bills to pay, but no money to do so, even though there may be thousands of dollars owed by customers.
That’s where two financing options — asset-based lending and factoring — come in to play. Both can provide the liquidity needed to keep the wheels moving and customers happy. Asset- based lending is a working capital product that provides a line of credit against property such as equipment or a company’s accounts receivable. This is typically a percentage of the property, and if the loan is not repaid, the lender can take the asset. In factoring, the lender purchases the accounts receivable, which then becomes the lender’s property. In the transportation industry, factoring is normally handled “with recourse,” meaning your company assumes the risk and losses for unpaid invoices.
Both options have benefits and disadvantages depending on the nature and goals of your company.
“Asset based lending typically provides greater leverage, softer covenants and more flexibility than other forms of traditional bank financing,” says Bryan Alsobrooks, senior vice president and director of Crestmark’s Transportation Services division.
Assets could include trucks or equipment and accounts receivable. A lender will typically make available 75 to 85 percent of the accounts receivable value for borrowing and a much smaller percentage of the truck or equipment value, although the number varies depending on each company’s specific situation. In the transportation industry, asset-based loans are typically used for day-to-day operations, including fuel, insurance payments, payroll, lease payments and more. If you send in borrowing- base certificates daily, you can typically get funded the same day. Asset-based lending is not typically used for purchases with a set dollar amount, like a truck or property. Those purchases work better with term financing or leasing because in asset-based lending the lender is approving a percentage of the available collateral, and the amount you are approved for and payment terms will vary.
A company considering asset-based lending should expect to provide a minimum of two years of financial statements and a statement of cash flow as well as for the most recent interim period. Setting up the process takes about 45 to 60 days, so companies should make sure to apply for funding as soon as they know the funds will be needed.
“The lender will do quite a bit of financial analysis to truly understand your company’s cash flow requirements,” Alsobrooks says. This typically includes a field exam, credit testing, verification of outstanding collateral, analysis of customer claims and disputes, accounts receivable aging evaluation and other analyses.
Alsobrooks says the benefit of this type of financing is you are typically dealing with a borrower that is large and sophisticated with many resources and assets at its disposal. However, this also means asset-based lending can have stringent requirements. For example, companies with less- than-perfect credit probably won’t qualify for it.
“Lenders are typically looking for companies with sizable equity who are profitable and have stable operational cash flow,” Alsobrooks says. “They are also looking for business-savvy and technologically sound companies because it is typically the company’s responsibility to manually prepare reports and information for the lender to review.” It is also typically the responsibility of the company to handle the day-to-day back-office functions of your business, such as billing and collecting.
If you are thinking about asset-based lending, remember you will need to frequently report financial information such as new sales and cash postings. You should also pay attention to any financial covenants in your asset-based agreement, such as tangible net worth, retained earnings or fixed asset coverage. These covenants vary depending on your lender and financial condition, but you should make sure you understand and agree to all of them up front.
The biggest difference between asset-based lending and factoring is the collateral used to secure the funding. In a factoring environment, the factor or lender purchases the accounts receivable and they become their property, while in asset-based lending, the accounts receivable are your property unless you default on the loan.
However, factoring is usually with recourse, meaning your company assumes the risk for unpaid accounts receivable. Factoring without recourse, meaning the factor or lender assumes the risk, is not as common and typically comes with a higher fee. Also, while companies are typically responsible for back-end operations like billing, collections and credit approval in an asset-based situation, a factor typically handles those operations in a factoring arrangement. As such, fees are typically higher with factoring and are based on the age of the receivables, while in asset-based lending, you pay interest.
“In addition to providing back-office administration, factors also typically advance a higher percentage of accounts receivable than asset-based lenders, sometimes 90 percent or more,” Alsobrooks says. “The benefit is that your company is able to focus less on human resources and administration and more on growing the business.”
Similar to asset-based lending, factoring is typically used for companies that need cash flow for day-to-day operations.
How it can help
Alsobrooks shared an anecdote of how factoring worked for one of his clients: A driver who had worked for a company for a number of years decided he wanted to start his own transportation company. When he began the factoring process, he was generating $15,000 a month, but now, he is generating $1 million to $2 million a month because factoring provided him with the
flexibility he needed to grow his business. He was able to secure more customers and earned a good reputation in the industry by placing his efforts in those areas of the business rather than administrative tasks.
How to start
Applying for factoring is a simple process. You typically fill out an application, and then the factor or lender conducts due diligence that includes checking to make sure you’re in good standing with the state you operate in and performing background checks on your principals and customers. The process typically takes about five to 10 days and does not include a field exam or audit because the factor is providing the back-office services. There is also typically no minimum in accounts receivables.
“Factoring is a better option for companies with less-than-perfect credit, but those aren’t the only companies that should consider it,” Alsobrooks says. “It is also a great option for companies, like those in the transportation industry, that need cash flow and don’t want to handle their back- office operations so they can grow their business.”
If you choose to explore factoring, keep in mind you should make sure the work you’re submitting invoices for has been completed prior to submitting the invoices. Also, make sure you understand your factor’s processes and what it expects you to provide.
“One of most important things for both the factor and customer is getting to know who you should be talking to day to day,” he says. “Don’t take for granted that you’re getting your money. Take some time during the course of a week to reach out and make sure everything is going OK. Nobody likes surprises, and you don’t want to look up 90 days past the date of the invoice and have the factor recourse that invoice back to you. Be proactive.”
The bottom line
Whether you’re thinking about asset-based lending or factoring, Crestmark Bank has you covered.
“One of the things that differentiates us from our competitors is we have the ability to take a company from infancy and grow it over time,” Alsobrooks says. “If a company becomes ready financially, technologically, etc., to move into another product, we have the ability to move them into that product while keeping the same people managing the account.”
This enables Crestmark to better understand clients’ needs and ultimately to work with them more effectively. “We’re all about helping businesses,” Alsobrooks says. “We really have made a difference in our clients’ lives and businesses.”
Bryan Alsobrooks joined Crestmark in November 2007 as senior vice president and director of the Crestmark Transportation Services division. He has more than 20 years of credit and collection experience in the commercial finance industry. Alsobrooks is active with the International Factoring Association and has served as chairman and vice chairman for the NACM National Transportation Credit Group. He received a bachelor’s degree in business administration from Austin Peay State University. You can contact Alsobrooks at (615) 620-3536or balsobrooks