Freight Factoring Company Reviews

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

There are  numerous misperceptions  amongst CFOs and finance executives when it  concerns asset-based lending. The  greatest is that asset-based lending is a financing  alternative of  last hope – one that only “desperate” companies that can’t  get a traditional bank loan or line of credit would  think of.

 

With the economic  recession and resulting credit crunch of the past few years, though, many companies that might have  gotten more traditional  types of bank financing in the past have  now  relied on asset-based lending. And to their  wonder, many have  discovered asset-based lending to be a flexible and cost-effective financing  instrument.

 

What Asset-Based Lending Looks Like

 

A  normal asset-based lending scenario often looks something  similar to this: A business has  gotten through the recession and financial crisis by aggressively managing receivables and inventory and delaying replacement  capital spending.  Since the economy is in recovery (albeit a weak one), it  will need to  build up working capital  to fund new receivables and inventory and fill new orders.

 

 Sadly, the business no longer qualifies for traditional bank loans or lines of credit due to high leverage, deteriorating collateral and/or  extreme losses. From the bank’s perspective, the business is no longer creditworthy.

 

Even businesses with strong bank relationships can run afoul of loan covenants if they  experience short-term losses, sometimes forcing banks to  rescind on credit lines or  drop credit line increases. A couple of bad quarters doesn’t necessarily  signify that a business  finds themselves in  difficulty, but  at times bankers’ hands are tied and they’re  required to make financing  choices they might not have a few years ago, before the credit crunch  altered the rules.

 

In  situations like this, asset-based lending can  supply much-needed  money to help businesses  endure the storm. Companies with  good accounts receivable and a  sound base of creditworthy customers tend to be  the most suitable candidates for  factoring loans.

 

With  conventional bank loans, the banker is  largely  interested in the borrower’s projected cash flow, which will provide the funds to repay the loan.  That is why, bankers pay especially close attention to the borrower’s balance sheet and income statement  so as to  evaluate future cash flow. Asset-based lenders,  conversely, are  mainly  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  typically have machinery or equipment independently valued by an appraiser. For inventory-backed loans, they  usually  need regular reports on inventory levels,  together with liquidation valuations of the raw and finished inventory. And for loans backed by accounts receivable, they  often perform  thorough analyses of the eligibility of the collateral based on past due, concentrations and quality of the debtor base. But  not like banks, they  typically 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 actually an umbrella term that  covers several different  kinds 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.

 

 Receivable 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 moment of purchase; the balance, less the factoring fee, is released when the invoice is collected. The  invoice discounting fee typically ranges from 1.5-3 .0 percent,  relying on such  things as the collection risk and  the amount of days the funds are in use. See Freight Factoring Company  Reviews

 

Under a  contract, the business can usually  pick which invoices to sell to the factor.  As soon as it purchases an invoice, the factor  deals with the receivable until it is paid. The factor will  practically become the business’ defacto credit manager and A/R department, ” conducting credit checks,  evaluating credit reports, and mailing and documenting invoices and payments.”.

 

A/R financing, meanwhile, is  similar to a  standard bank loan,  yet with some  chief differences.  Even though bank loans may be secured by different kinds of collateral including equipment, real estate and/or the personal assets of the business owner, A/R financing is backed  purely 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  usually must be  under 90 days old in order to count toward the borrowing base. There are  frequently other eligibility covenants  like cross-aged, concentration limits on any one customer, and government or international customers, depending on the lender. In some cases, the underlying business (i.e., the end customer) must be deemed creditworthy by the finance company if this customer makes up a majority of the collateral. We encourage you to read Freight Factoring Company  Reviews online for you to learn more about it. 

 

 

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