Receivables Financing

To finance your receivables or not to finance your receivables, that is the question. For small to medium sized businesses, it is often a difficult decision and oftentimes even harder to find a provider.

Receivables financing allows you to unlock what is often the biggest asset on your company’s financial statements and use it to grow and manage your company. But, how can you move the money from your Balance Sheet and put it into your Checking Account?

There are several ways to accomplish it. It is important to find the best fit for your business.

Before looking at the different options, it is important to determine what types of businesses could benefit from receivables financing. Here are just a few of the characteristics of companies that could use it. Companies who:

• Have their main expense as labor and not hard assets such as land or equipment (staffing, service businesses and consulting)
• Are growing annually at 20% or more
• Need a lot of expensive equipment to run their businesses (printers and manufacturing companies)
• Need weekly cash flow for payroll or expenses (trucking companies or companies with hourly paid employees)
• Have seasonal sales cycles
• Sell to large, slow-paying customers
• Less than two years old

These characteristics usually need receivables financing. So, what are the different options available to them? The main options are lines of credit, bank receivables financing programs and factoring. Let’s look at an overview of each of these.

Line of Credit

Most banks offer lines of credit. Typically, each bank has their own criteria for offering a line of credit, but the main characteristics are:

• Advance rate of 60% to 80% of accounts receivable 60 days old and less
• Rate based on Prime plus or minus additional percentages
• Personal guarantee required
• Credit requirements are high
• Usually secured with additional collateral in addition to the accounts receivable
• Usually requires a full banking relationship at the bank

This option is usually the lowest cost but it tends to have a lower credit amount available and have the highest credit criteria.

Bank Receivables Financing Program

Few banks offer a Receivables Financing Program because of the additional services that the bank needs to provide to their customers on this type of program. The main characteristics of these programs are:

• Advance rate of 90% of accounts receivables less than 90 days old
• Rate based on average collection period and monthly dollar volume and the rate is equivalent to the cost of accepting credit cards for payment
• Personal guarantee required
• Credit requirements are lower than a conventional line of credit
• Main source of collateral are the accounts receivable
• Usually does not require a full banking relationship with the bank

This option has a higher annual cost than a traditional line of credit, but has lower credit standards, higher line availability and less restrictions or negative covenants. It works best when the additional cost can be offset by the additional flexibility that cash provides.

An example of this type of program is Chesapeake Bank’s Cash Flow Program (www.chesbank-cashflow.com). Chesapeake Bank has offered the program for 14 years to hundreds of companies throughout the United States allowing them a quicker access to cash to help them run their businesses more profitably.

Factoring

Factoring is typically offered by non-bank entities and they simply are advancing money to companies based on the credit worthiness of the customers on the accounts receivable report. The main characteristics of a factoring program are:

• Advance rate of 80% of accounts receivables less than 90 days old
• Rate is based on an initial fee in addition to a “per day” rate in addition to fees for wiring, mailing, report generation, annual renewal and others. It is the most expensive option
• Often requires no personal guarantee
• Low credit requirements, if any
• Main source of collateral are the accounts receivables and documents signed by the companies on the accounts receivable list promising payment
• Does not require any banking relationship

Each option has positive components for small to medium sized businesses. It is important to know all of the options available before deciding on one solution that will help your business the most.