Transportation Factoring Companies


It’s Time to Take a  New Look at Asset Based Lending


There are many misunderstandings  amongst CFOs and finance executives when it  concerns 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  secure a traditional bank loan or line of credit would  think of. See Transportation Factoring Companies


With the economic  decline and resulting credit crunch of the past few years, though, many companies that might have  gotten more traditional  kinds of bank financing in the past have instead turned to asset-based lending. And to their surprise, many have  discovered asset-based lending to be a flexible and cost-effective financing tool.


What Asset-Based Lending Looks Like


A  conventional asset-based lending scenario  frequently looks something  similar to this: A business has  made it through the recession and financial crisis by aggressively managing receivables and inventory and delaying replacement capital expenditures.  Since the economy is in recovery (albeit a weak one), it  will need to rebuild working capital in order 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  substantial losses. From the bank’s  viewpoint, the business is no longer creditworthy.


Even businesses with  solid bank relationships can run afoul of loan covenants if they suffer short-term losses,  in some cases  compelling banks to  rescind on credit lines or  drop credit line increases. A couple of bad quarters doesn’t necessarily indicate that a business is in  difficulty, but sometimes bankers’ hands are tied and they’re forced to make financing  moves they might not have a few years ago, before the credit crunch  altered the rules.

In  situations like this, asset-based lending can  deliver  the needed  finances to help businesses  survive the storm. Companies with strong accounts receivable and a solid base of creditworthy customers tend to be the best candidates for asset-based  advances.


With traditional bank loans, the banker is  predominantly concerned with the borrower’s  predicted cash flow, which will  supply the funds to repay the loan.  That is why, bankers pay  particularly close attention to the borrower’s balance sheet and income statement  to  evaluate future cash flow. Asset-based lenders,  conversely, are  mostly  worried about the performance of the assets being pledged as collateral, be they machinery, inventory or accounts receivable.


 Therefore before lending, asset-based lenders will usually have machinery or equipment independently valued by an appraiser. For inventory-backed loans, they  usually require regular reports on inventory levels,  in addition to liquidation valuations of the raw and finished inventory. And for loans backed by accounts receivable, they  typically perform  comprehensive analyses of the eligibility of the collateral based on past due, concentrations and quality of the debtor base. But  compared with banks, they  normally 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  covers several different  styles of loans that are secured by the assets of the borrower. The two primary types of asset-based loans are factoring and accounts receivable (A/R) financing.


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


Under a  contract, the business can usually pick and choose which invoices to sell to the  factoring company.  As soon as it  buys an invoice, the  factoring company manages the receivable until it is paid. The  factoring company will  practically become the business’ defacto credit manager and A/R department, ” carrying out credit checks,  evaluating credit reports, and mailing and documenting invoices and payments.”.


A/R financing,  on the other hand, is  similar to a  typical bank loan,   with some key differences.  Although 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  set up 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  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 upon the lender. In some cases, the underlying business (i.e., the end customer) must be  considered creditworthy by the finance company if this customer  constitutes a majority of the collateral. Also see Transportation Factoring Companies