| FACTORING (ASSET-BASED
LENDING) |
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A Factoring Specialist
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A Creative Financing Alternative For Cash-Strapped
Businesses
The economic slowdown
has affected companies in different ways; particularly as
banks are tightening the screws on many small business borrowers,
often refusing to grant credit to new borrowers or extend
the credit lines of existing customers.
It is often the fast-growth
companies that find themselves in the middle of the credit
crunch. Companies showing annual growth rates of 15-20% or
more tend to make banks nervous, because fast growth can upset
the company's ratio and result in temporary periods of unprofitability.
The good news is that
there is a financing alternative designed especially to help
companies in this type of situation. Asset-based Lending is
an ideal source of financing for companies who can't qualify
for traditional bank financing due to fast growth or other
extenuating (and often temporary) financial circumstances.
These may include new and startup firms, firms with increased
seasonal inventory need or any business that is financially
challenged, but has a strong foundation and business plan
put in place.
HOW IT WORKS
There are two primary
types of asset-based lending: factoring and accounts-receivable
financing. The way that factoring works is fairly simple:
Companies 'sell' their outstanding receivables to the finance
company at a discount - typically between 2-5%. The rate depends
on the overall risk associated with the transaction, the number
of days the funds are in use and/or the amount of revenue
involved in the transaction. Most of the revenue, usually
around 80% is advanced to the business at the time the invoice
is generated, and the balance once it has been collected.
There are two main benefits to the company:
1. Elimination of credit analysis, collections and
credit risk.
The finance company analyzes the creditworthiness of companies
behind the receivables and assumes the responsibility (and
sometimes the risk) of collections.
2. Drastic reduction of the cash conversion cycle.
Reducing collection days from the standard 30 days to two
days with factoring reduces the total days in a typical collection
cycle by 28 days, allowing a considerable increase in gross
profit margins. With accounts-receivable financing, rather
than selling their receivables outright, companies borrow
against the value of their receivables, using their receivables
as collateral for the loan. The lender will advance funds
based on a calculation of the outstanding receivables. This
type of relationship typically requires the borrower to have
the ability to report pertinent information daily or weekly.
Rates generally consist of two components: An Interest Rate
and a Collateral Management Fee.
When considering companies for accounts-receivable financing,
a finance company will look primarily at three things:
a. Financial stability
b. No customer concentration (not more than 80% of sales to
one customer)
c. Solid financial reporting capabilities (e.g., sales, collections,
A/R)
FINDING THE RIGHT LENDER
In the search for
the right asset-based lender to meet your needs, your banker
is a good place to start. Some banks do asset-based lending
in-house, others will refer you to a finance company, like
ROSEBANK CAPITAL.
Finally, be sure to
examine potential finance companies thoroughly. In particular,
look closely at their stability (how long have they been in
business?) and how well they are capitalized.
Call us at 1.888.864.2652
to explore asset-based lending options for Your Business.
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