Asset-based financing companies provide funds secured by the assets of the borrower. The collateral can include: accounts receivable, inventory, machinery, real estate, patents, trademarks or other assets where value can be determined.
The secured lender may establish a revolving loan where the borrower provides a pool of collateral that the lender translates into operating cash or working capital. The borrower uses the financing to buy more materials, expand marketing, improve productivity or other improvements and sells the resultant product. The sales create receivables that are pledged for cash advances and the payments received on the invoices pay down the loan. These increases and reductions in the loan balance are cyclical, hence the revolving nature of the loan.
Some receivables have less collateral value, for example, progress billing, past due receivables, and receivables subject to “set-off”. Raw materials and finished goods are normally acceptable collateral, but work-in-progress generally is not. Equipment and real estate may also be used as a source of financing.
Traditional & Other Types of Factoring:
The financing institution accepts assignment of the receivable but does not assume the credit risk. The client retains responsibility for managing the receivable portfolio. Generally, the factoring company will finance invoices up to ninety days from delivery of goods or services. Sizeable advances are made to the client when the invoice is generated (e.g. 80%) with the balance held as a reserve, and the factoring company waits to be paid by the customer at maturity. Once the factoring company is paid, the company releases the reserve to the client, less the fee earning for providing the financing.
Express Business Funding offers: Discount, Notification, Non-Notification, Spot, and Purchase Order Factoring services. To learn more please call us and speak to one of our business funding solutions experts.