Factoring Companies: Accounts Receivable Specialists

Many business owners ask why banks are unwilling to lend to companies that have good-quality accounts receivable, but that lack other collateral, such as real estate, equipment and inventory. Historically, banks were not the places to go if you wanted to borrow against the value of accounts receivable, particularly if you had no additional collateral. Let’s break down the possible assets your business is likely to leverage:

Fixed Assets

Fixed assets are generally considered to be tangible assets, in other words, things you can touch and see. They differ from “current assets” in that they are considered long-term or “durable” in nature, as opposed to assets that are sold in the ordinary course of a company’s business to generate revenues. While fixed assets are also used by a business to generate revenues, they are not sold, per se. Plants, equipment, and land are often necessary for some businesses to run, but these assets remain on the books of the company and are depreciated over a period of time as their economic usefulness declines (except for land, of course). Banks and traditional lenders love to lend against fixed assets. Although they may, in some circumstances, be mobile, fixed assets are tangible; market values can be established, and values tend to hold up, at least for a relatively long period of time during which the principal balance of a loan can be repaid.

Current Assets

Current assets include assets that are sold or consumed by a business as a primary means to generate revenues. The most common examples of current assets are inventory and accounts receivable. While inventory is a tangible thing that you can touch and see, accounts receivable are a “right to receive a future payment.”

Factoring

While many lenders will loan against current assets, the advance rates tend to be considerably lower than for fixed assets. For example, it was not uncommon during the ’90s and early 2000s for banks to lend between 90% and 100% against the value of fixed assets. Most lenders, however, limit advances against accounts receivable to between 50% and 85%, depending upon account quality, concentrations, etc. Furthermore, many lenders will not consider lending against current assets unless a company also has fixed assets that it can pledge as additional collateral.

Factoring companies, on the other hand, are accounts receivable specialists. They do not require their clients to have any fixed assets, nor do they require a first lien in cases where fixed assets do exist. As a result of being accounts receivable specialists, factoring companies are likely to advance far greater amounts against accounts receivable than other lenders. In some industries, it is not uncommon to find factoring advance rates on accounts receivable as high as 95%.

Service industries, such as nurse staffing, temporary staffing, IT staffing, and security guard services, are perfect examples of industries where factoring is common, yet individual companies lack any significant fixed assets. Trucking, on the other hand, is an industry in which factoring is prevalent, and companies have a multitude of fixed assets (usually tractors and trailers financed by another lender). Factoring is also popular among manufacturers, wholesalers, importers and distributors.

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