At 1st Commercial Credit, our accounts receivable lending service is a flexible source of funds for businesses. We specialize in financing the growth of distributors, manufacturers, service providers, transportation companies and exporters.
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Accounts receivable lending is not like a traditional loan. This type of "loan" does not act as a bank loan, but the term "loan" is added to help differentiate it from other alternative financing solutions. With this particular financing solution, a company will receive an advance based on the purchase of its receivables.
There are no payments or debt created. A company has the flexibility to select which receivables to submit to the lender for early payment. The financing rates associated with this form of financing are generally lower, transactions do not appear on the balance sheet, and do not impact a company's debt ratio.
1st Commercial Credit can lend you up to 97% depending on the amount of accounts you sell to.
A lender's general ledger account for loans receivable contains the current balance of all loans owed to it by borrowers. This is a lender's primary asset account. A subsidiary ledger can be used to keep track of each of the outstanding loans, with the subsidiary ledger's ending balance matching the general ledger's final balance for the loans receivable account.
Lending on accounts receivable is what we do by advancing funds against your accounts receivable. Due to our expertise and knowledge in the industries we fund, we can provide higher advance rates with competitive fees.
In the past, it was common for businesses to use banks for all of their financial needs.
As the economy changes, it is clear that there is a need for small businesses to have more than one way to meet their borrowing requirements. Banks put the risk on business owners by giving money in exchange for property collateral. Conversely, a profitable alternative is invoice borrowing or accounts receivable loans. To use services that allow you to borrow money on your receivables, all you need is an unpaid invoice.
Whether you offer a service or a product, you must wait for your clients to pay their bills. While you wait for the check to clear, you may lose an opportunity to invest capital or extend credit to your clients.
On the other hand, if you have access to a majority of that cash immediately, your ability to expand your business becomes much easier. Instead of waiting through the process of having your property appraised by the bank, you can have a line of credit extended to you based upon any of your unpaid invoices.
This way, slow-paying customers are no longer an issue and you can pay your staff, cover operational expenses, purchase new inventory, pay for unexpected expenses and solve other problems.
When you have an invoice that has gone unpaid for an extended period, you may be losing money in unexpected ways. For example, other bills that you want to pay may have late fees. An empty bank account can quickly cause checks to bounce, and fees to incur.
In other words, sometimes it is better to lose a small percentage on your unpaid invoices than pay larger amounts as time goes on. This is the idea that makes factoring companies appealing. In some cases, a company with an unpaid invoice can receive up to 97 percent of the original sum. While they may lose $3 for every $100 of the invoice, most companies feel it is better to have the cash today than wait for an invoice to become delinquent.
When you are a new business, it is beneficial to build your credit. By borrowing on your receivables, you will be able to earn credit points each time. You can also avoid stiff penalties (and credit report demerits) for forgetting your monthly repayment to the bank.
Other benefits of borrowing money on receivables are:
Although there may be factoring companies in your local area, you can easily set up an account with similar services online.
Unlike bank loans that require you have equal property collateral, invoice factoring services can allow you to borrow much more. Regardless if you are a small business or a multinational corporation, you can find much easier solutions by borrowing money on your receivables.
To more clearly understand the crucial differences between these three types of accounts receivable financing, we will explain the meaning of each one separately.
Asset-Based Lending involves a revolving line of credit that will allow your business to borrow cash based on the accumulated value of the assets used to secure the credit line. Lending companies will generally determine the percentage of your company's assets' value to establish the borrowing base. Assets commonly used to secure this type of financing include inventory, accounts receivable, equipment, and other business assets. Once your company is approved, and the borrowing base is determined, the lender will give you the flexibility to get cash from the line as needed.
Factoring — with this type of accounts receivable financing, the factoring company will buy the ownership of your outstanding invoices, which grants the right to collection directly from your clients. When the invoices are purchased from your company, a percentage of the value of the invoices is given straight away. Once the clients pay for those invoices, the remaining balance of the factoring loan will be sent to you minus a small factoring fee for the services.
Accounts Receivable Loans — this type of loan against receivables does not act as a traditional bank loan. With this particular financing solution, a company selects which receivables to submit to the lender (1stCC) for early payment. As opposed to factoring, with an accounts receivable line of credit, your company will initially receive full payment for each invoice and not have to wait for the remaining balance once the invoices are fully paid. This is the main reason why it is called a "loan," even though it is extremely different from a traditional loan. The financing rates associated with this form of financing are generally lower, transactions do not appear on the balance sheet, and do not impact a company's debt ratio. 1st Commercial Credit offers low and competitive accounts receivable loan rates.
In terms of confidentiality, with most ABL, A/R financing, and factoring transactions, customer payments are made directly to a secure lockbox where payments are automatically used to reduce the overall loan balance. With A/R Financing and ABL's, payments are usually made in your name, so your customers need not necessarily know that you're using an alternative form of financing. With invoice factoring, checks from your customer may be made payable to the factoring company depending on the type of factoring service used (recourse, nonrecourse).
Asset-based lending lines of credit are mostly given to larger, more established companies with a good credit history. There is a considerable risk associated with this type of financing. A business's credit is the main requirement as well as that of your customers. Because of all the due diligence related to ABL, rates are generally much lower than factoring and involves a more straightforward ongoing verification process. More due diligence is required initially, but after that, there is less contact with your customers.
Invoice factoring is considered riskier than ABL because the lending company takes all the credit risk if your customers cannot pay for the invoices. This financing solution is available to smaller companies and startups with low or poor credit and scarce financial history. Factoring and A/R lines of credit can be more expensive than ABL lines, but with factoring, the creditworthiness of your customers is more of a priority than your business's credit history.
On the other hand, factoring involves a higher level of interaction with your clients. Accounts receivable financing has less risk when compared to factoring. ARL considers both the creditworthiness of your business and your customers. With this type of financing, the lender will be able to offer much more flexible terms, but at the same time, the lender may require more contact with your customers. On the other hand, many A/R finance companies will take over the back office responsibilities such as A/R management and collections, leaving you with more time to focus on other areas of your business.