Asset Based Lending, invoice discounting and invoice debt factoring
Your assets are a lifeline when you need quick access to additional finance. Here’s our guide on some of most common asset based financing.
Asset based lending
Asset based lending (ABL) is a form of financing where the funder lends money by reference to certain assets held by the borrower such as property, plant & machinery, equipment or debtors. Unlike cash flow lenders, ABL providers look primarily to the company’s assets as its source of repayment
Asset based lending is typically used by businesses looking for quick capital to finance a purchase of equipment or stock, urgent expansion, restructuring plans or in distressed situations.
It’s a fast, cost-effective way to raise working capital bridging cash flow gaps whilst maintaining growth in the core business.
ABL does not involve giving up any equity in the business
Ideal for businesses that cannot source any unsecured loans
Lenders will perform due diligence on type and quality of the asset and check whether there are any encumbrances on the collateral
Lenders will look to reduce exposure if the value of the asset reduces over time
Fewer restrictive financial covenants tend to be imposed than on term loans but you need to be aware that a company default will lead to the ABL facility being removed and reduce the shareholder value.
Invoice discounting
The most common form of ABL finance is invoice discounting. As bank financing has become more restrictive, particularly as a result of the credit crunch, invoice discounting has become a major source of working capital finance. Banks nowadays favour providing invoice discounting over an unsecured loan or overdraft as their finance is linked to collateral. Invoice discounting allows businesses to get cash in advance of the customer paying their debt.
Invoice discounting works by providing the invoice finance provider with invoice details of your customers and then providing you with funds based on a certain percentage value of the invoice. You still retain control of the credit control process to chase and collect on customer debts. However once the customer has paid, a proportion of that cash is paid to the finance provider.
Invoice discounting providers will give you better terms for better paying customer invoices/debtor lists where customers reliably pay on time.
The most common types of invoice discounting include:
Confidential invoice discounting
Invoice financing is arranged confidentially ensuring customers and suppliers are not aware you are being advanced capital against invoices prior to payment being received.
Whole turnover invoice discounting
The invoice finance provider is given the entire debtor book and provides capital against the whole sales ledger irrespective of need.
Selective invoice discounting
Instead of providing capital against the entire sales ledger which can be expensive, you can sell a specific invoice to the finance provider for a discount. This can be more appropriate for businesses with seasonal fluctuations in cash but can take time to set up with the finance provider.
Invoice debt factoring
Don’t confuse invoice discounting with ‘debt factoring’. Debt factoring is where a debtor (receivables) book is sold, at a discount, to a third party for cash. Invoice discounting is a loan and you keep the debtors on your book to collect yourself.
Debt factoring providers manage the sales ledger and credit control function for a fixed period of time and in return advance a proportion of the funds upfront. When the end customer pays, the factoring provider collects the debt and provides the remaining proportion of the funds less their fees. Debt factoring can unlock funds tied up in unpaid invoices and reduce admin in chasing debts. However, it can also lead to the third party finance provider aggressively collecting on outstanding debts which can lead to less amicable customer/client relationships. Most of the time the business clients/customers are aware of the factoring company being involved (i.e. disclosed) but some do offer a confidential arrangement.
Most debt factoring providers require security by way of a debenture against the business assets, a personal guarantee or warranty from the director.
Other considerations to note are whilst the rates may look favourable be wary of extra fees or disbursements, termination costs and refactoring fees. Refactoring fees can be charged where after an agreed approval period any unpaid invoices are recoursed back to the business and any funds advanced by the debt factor need to be repaid back.
Factoring facilities normally stipulate low concentration limits (i.e. not being reliant on one or two main customers) and also limits on foreign exports.
The most common types of invoice debt factoring include:
Whole ledger factoring
The debt factor provider takes on the entire debtor book.
Spot factoring
An individual invoice is sold to the debt factoring company rather than the whole ledger which is normally more expensive and can be time consuming to set up as no previous relationship is in place.
CHOCCS
Whilst most often the debt factoring company handles the debt chasing, some will allow for the client to do this. This is known as ‘Client Handles Own Credit Control’ or CHOCCS.
Non-recourse facilities
Debt factor provides credit insurance where the unpaid amount is recovered through insurance should the business’ customers/clients default on their payment or go into insolvency. Recourse facilities provide no credit insurance and therefore any advances made where a client/customer default will need to be repaid back to the factor.