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Asset-Based Financing

When a company grows quickly, it often exceeds the limits of its bank lines of credit or other financing and does not yet have the historical financials many banks require to support an increase.

Written By: Tiffany C. Wright
When a company grows quickly, it often exceeds the limits of its bank lines of credit or other financing and does not yet have the historical financials many banks require to support an increase. In this case one type of asset-based financing, accounts receivable financing, can serve as an excellent financing source to bridge the gap. As the company expands, it increases its revenues significantly. These same revenues, via the receivables created, can provide the base for the financing enabling the company to continue its growth trajectory. This assumes the company only needs to spend minimal sums on fixed assets. Because accounts receivable financing is a short-term financing solution, it must be used as such. You must finance short-term expenses such as payroll, materials, and other costs tied to production. You must finance long-term expenses such as hiring of management, office or plant expansion, or the purchase of large equipment, with long-term financing solutions. One type of asset-based financing that serves long-term capital needs is equipment financing. We will discuss these asset-based financing alternatives below.

Accounts receivable financing

A true accounts receivable is money due for a product that has been shipped, received, and accepted or for a service that has been rendered. The receivable is created when the supplier of the product or service invoices the recipient. Accounts receivable financing firms set up a revolving line of credit using your accounts receivable as collateral and generally have little or no involvement with your customers. You still own your invoices and therefore you maintain the relationships with your customers.


Factoring is also asset-based financing that uses accounts receivables as the asset against which the financing is provided. The receivable is created in the same way as above. Factoring firms (also called factors), however, purchase the accounts receivables outright. Since the factor buys the receivable in advance of payment, the factor purchases the receivable at a discount. The factor now owns the account receivables and will follow up directly with the customer to procure payment. Many factoring firms arrange the payment process to make the collection of the payment against the receivable transparent - the customer believes they are directly paying the entity they purchased the good or service from.

Accounts receivable financing or factoring?

The primary difference between accounts receivables financing and factoring is that factoring firms purchase the receivables outright taking ownership of the receivables whereas accounts receivable financing (aka A/R financing) firms place liens on the receivables but the client retains ownership. The A/R financing firm then provides a line of credit to the client against those receivables.

In contrast, the factoring firm paid a discount for the receivables. The rates charged typically range from prime +1.5% for lines of credit of $3 Million and higher to prime + 3.5% for smaller, less credit-worthy lines of credit. In addition, A/R financing firms charge service fees of 1-3% monthly. Both tend to charge additional fees for all receivables that exceed 30 days.

Sometimes less credit-worth firms or firms that generate lower monthly revenue are better candidates for  factoring. Factors base much more of their credit decision on the credit-worthiness of the customers generating the receivables than the credit-worthiness of the entity providing the good or service.

With construction, many customers hold back a portion of the payment to ensure performance. As a result, many accounts receivable financing firms do not provide lines of credit to construction firms. However, there are a number of factoring firms that will purchase and thus, fund the receivables.

Equipment financing

If you seek to expand your fleet of dump trucks, back haulers, back hoes, lift trucks or production equipment, equipment financing may be the answer to your funding needs. Equipment financing providers range from small equipment lending entities or brokerages to large equipment lenders such as Textron Financial which provides financing and leases on high multi-million dollar assets such as airplanes, vessels, and helicopters. Equipment lenders include original equipment manufacturers, equipment vendors and distributors, independent leasing companies, and affiliates / brokers that provide financing for the equipment they sell and lease.

Many equipment manufacturers offer built-in financing. They often provide the financing to purchase the equipment outright or provide leasing arrangements. A few providers, primarily distributors, may offer

Entities that provide equipment loans use the equipment - and rarely much else - as the collateral. Due to the high integrity of the collateral and the lending entities deep familiarity with the characteristics of the collateral, a non-bank equipment loan typically allows for a lower credit rating and looser operating history than that required by banks. Equipment leasing providers allow even lower credit standards since they retain ownership and you enter into short-term rentals or long-term leases for the equipment.

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