The financing landscape in the year ahead—and beyond
A/R financing is more like a traditional bank loan, but with some key differences. While bank loans may be secured by different kinds of collateral (including plant and equipment, real estate and/or the personal assets of the business owner), the size of the facility is usually predicated on the cash flow coverage the income statement generates. A/R financing or ABL facilities are structured against the current assets of the balance sheet. This may involve A/R only or it may also include inventory and/or equipment — it varies from lender to lender.
Under an A/R financing arrangement, a borrowing base of 70 to 90 percent of the qualified receivables is established at each draw against which the business can borrow money. In addition to interest being charged against the funds advanced, there is usually some sort of collateral monitoring fee or management fee that is charged — again, this will vary by lender. In order to count toward the borrowing base, the accounts receivable typically must meet an eligibility formula that the finance company tracks. Other conditions will also apply as it pertains to inventory and equipment.
Both factoring and A/R financing are usually considered to be transitional sources of financing that can carry a business through a time when it does not qualify for traditional bank financing. After a period typically ranging from 12-24 months, companies are often able to work through their circumstances and become bankable once again.
In some industries, though, companies rely on ABL as a permanent source of financing. Trucking, apparel manufacturing, import/export distribution and many service industries rely heavily on ABL as their primary financing vehicle.
ABL is On the Rise
Statistics underscore the fact that, while many businesses are finding it harder to obtain traditional bank financing, asset-based lending is trending up. According to the FDIC, the overall volume of small business loans has been shrinking since 2008 and was recently down 15 percent from its peak. The total number of outstanding small business loans (about 1.5 million) is the smallest since 1999, according to the FDIC.
On the flip side, the most recent Asset-Based Lending Index, which is published quarterly by the Commercial Finance Association, reveals that total committed asset-based credit lines were up by 2 percent in the fourth quarter of 2012 compared to the previous quarter, and total credit commitments were 6.7 percent higher than a year earlier. In addition, the majority of asset-based lenders reported an increase in total committed credit lines.