Asset Based Lending (ABL) Funding Availability vs. Factoring
Steve Capper – Flexible Funding - July 17, 2017
All across the internet, in trade publications, mailings and trade shows, factoring and payroll funding companies offer to purchase invoices from staffing companies, on an invoice-by-invoice basis. Some of these same companies also offer programs doing an “asset based lending” (aka ABL) form of payroll funding. Asset-based lending does not look so closely at your individual invoices on a weekly basis, but rather, looks at the total figure of your accounts-receivables invoices
outstanding on your accounts receivable aging and/or balance sheet when determining the amount you can borrow. This is the structure banks generally use to determine your cash availability.
You must know the frequency, interval, and specific dates when a funding organization will take a snapshot or peg of your total accounts receivables in an asset based lending ABL structure. Taking this snapshot and determining your funding amount availability is referred to as doing a “borrowing base calculation.”
Here is what you really need to know:
If a bank or a payroll funding company offering ABL does the borrowing base calculation only once a month, and the calculation is done on a bank-mandated day of the month when the total A/R account receivable figure happens to be on the lower end, your availability could be choked for the following month (until the next date when it is pegged again). Any detrimental short term or rapid change in sales volume, collections, or holiday and seasonal fluctuations can reduce your A/R total and in turn reduce your peg amount and restrict your cash. You need to have a pile of liquid cash stashed away somewhere in case this ever happens.
For many businesses, even a twice a month borrowing-base calculation can be too tight. It doesn’t matter that a company proposes 80%, 90%, or even greater funding availability because it is only of a pegged amount, hopefully not a lower pegged amount. Some funding organizations will overfund your company during the cash constricted period, but the rate for overfunding will often be much higher and may require legal modifications to the funding agreement.
(Flexible Funding’s payroll funding programs will generally give more access-to-cash availability because the borrowing base calculations for the customer may be done at any interval or frequency…daily, or any day you choose.)
In an asset based lending ABL structure of funding it is usually set up so that the staffing agency customer payments will flow to a P.O. Box or lockbox controlled by by the lender. Occasionally an ABL lending credit program will be offered where the staffing agency customer payments may flow directly to the bank account of the staffing agency, which may be an account at a different bank than the lending bank. The qualification standards can be tough and the personal guarantees that the owners have to sign can be harsh for such an arrangement. If they do agree to such an arrangement, the lending organization will generally have to sweep (aka electronically transfer) funds from your account into the lenders account to pay down the loan you have. Some of the questions one needs to ask include:
What is the frequency and timing of the sweep?
Once the account is swept, when are the amounts credited? Some organizations hold onto your funds for a few extra days before giving you credit, especially if they are an out-of-state bank.
What other debits and credits may be involved in the sweep?
If it is a bank or bank owned funding company that is running the ABL program, these and other questions about sweeps will usually be answered by their Treasury Management Department.
If a lending bank does not let deposits flow into your account at another bank, and require that you have an account at the lender’s bank, be on the alert for attempts to charge additional banking service fees.