Accounts receivable funding is typically the main component of an asset based loan and generates the most working capital. Lenders prefer accounts receivable over other assets because it is the easiest asset to convert to cash.
Accounts receivable is the first collateral item on a borrowing base certificate. A borrowing base certificate is a form that a borrower submits to the lender on a scheduled basis, usually monthly or weekly, which indicates the current value of the collateral assets and the amount outstanding. The borrower must provide back up documentation including an accounts receivable aging, accounts payable aging and financial statements when submitting borrowing base certificates. Lenders typically do quarterly audits to verify the information being submitted.
Borrowers can expect to have an 80% - 90% advance rate on the accounts receivable funding portion of an asset based loan. The advance rate will be based on a few different factors including the average amount of dilution or returns the Company has had historically, the age of the receivables and the credit worthiness of the customers. Receivables are usually considered 'eligible' to borrow against until they are 90 days old. Lenders will look at the credit worthiness of the individual customers and exclude any customer balances if they think the risk of non-payment is high.
While Receivables Finance can be a great tool for funding certain businesses, there are some restrictions that borrowers need to be aware of. Lenders may impose debt-service-ratios to make sure the borrower has enough cash to cover the debt payments. Other restrictions may prevent owners from taking distributions, etc.
Many lenders will restrict the amount of funding on other assets such as inventory or equipment to a percentage of the total accounts receivable. Some lenders will impose 'concentration' restrictions on accounts receivable to limit funding on any one customer to only 25% of the total receivables.
Accounts receivable funding is the most important aspect of an asset based loan and generates the most cash. Accounts receivable is the first asset that a company should consider leveraging when generating working capital.
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Customized Financing Options
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Revolving lines of credit up to $20,000,000
Accounts Receivable Factoring
No minimums, up to $20,000,000
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