Many of our clients using accounts receivable factoring services qualify for other forms of financing after two or three years in business. While factoring accounts receivable is sometimes viewed as a temporary form of financing, the choice to replace a factoring relationship with a banking relationship is not always an obvious one.
Factoring companies are far more valuable because they are familiar with your accounts receivable assets, the value of your receivables will always be greater from a factoring company than any bank. While banks concentrate more on the cash flow side of the business and fixed assets to make a loan, factoring companies monitor the incoming stream of payments and review the credit quality of the accounts/buyers making a more accurate assessment of the value.
There are many benefits a factoring company provides that can be priceless. Sometimes clients don’t realize that a bank can cost more in other areas of the business than just the interest rate. The most common is restricted eligibility on accounts receivable when your business has limited number of customers. Factoring companies can offer increases within 15 minutes while traditional lenders decline or can takes weeks.
Businesses that outpace the credit line offered by banks can cost much more than the savings. Even if your business had a bank line of credit for free, the limited growth your business can experience by turning away business due to limited eligibility can cost you more than free money.
Let's assume your company decides to move over to a bank line of credit. The first thing that happens is your company’s borrowing base is established on cash flow and the accounts receivable are conservatively eligible for about 70% to 80%. No concentrated accounts are allowed more than 30% eligibility.
Receivable based lenders are at more risk when there are clients concentrated in sales and balances from very few customers or sometimes just 1 customer. Therefore, in order to minimize the risk, lenders will cap the eligibility on concentrated accounts.
1st Commercial Credit funds clients with singe account debtor concentrations with high advance rates as long as the account debtor has substantial financial strength.