A traditional method of financing, factoring allows you to get cash from your receivables.
- Used by the garment and floor-covering trades, sporting goods, appliances, wholesale jobbing, building supplies, and many other areas.
Types of factoring
- Non-borrowing. The factor collects the accounts and pays them over to you.
- Borrowing. The factor purchases your receivables and advances a specified portion of the total, perhaps 80%.
- Credit approval must come from the factor.
- Factors are an excellent source of credit reports.
- Invoices are usually stamped “Pay... Factors.”
- Costs include both management fee and cost of borrowing. Be sure to inquire about the actual fee structure.
- Factors handle all the accounts receivable associated with the issue of the original invoice.
- Factors may guarantee loans for their clients.
- Factoring can affect your normal bank lines of credit. Check with your banker before proceeding: your bank may be able to offer you similar options.
Asset-Based Lending (ABL) is a specialized form of secured lending based on the tangible assets of a company (inventory, equipment). ABL may be viable alternative when:
- additional funds are needed to finance growth or acquisition, or
- your business has suffered a setback
- Interest rates and fees are higher than traditional loans; however borrowing availability is generally higher.
- Lenders usually require an independent appraisal to determine net value of assets.
- Advance rates are based on the net realizable value of assets as they relate to inventory, machinery and equipment.
- Monitoring is at a higher level in order to manage collateral positions and company performance.
Warehouse Receipts Financing
A form of finished goods inventory financing.
- The lenders keep a close tab on your stock after an assignment to them.
- May advance up to 80% of the value of the stock from time to time (i.e., a higher proportion than under normal borrowing).
- Can vary up and down according to circumstances.