Credit Lines (Asset Based Lending) Vs Factoring Loans
According to the latest statistics, it has been revealed that traditional lending is showing a downward turn and people are showing interest in asset based lending. In fact, growing by the uptrend in the asset based lending, it is expected to grow even more in the future. The overall volume of small business loans has been sliding down according to FDIC.
This downward trend has been noticed since 2008. Recently, the volume of small business loans went down 15% from its peak. Since the year 1999, the number of outstanding small business loans has been continuously declining. The figure currently stands at about 1.5 million as notified by FDCI (federal deposit insurance corporation).
An Asset Based Lending Index is formatted by the Commercial Finance Association and published quarterly. The most recent report indicates there was a 1.8% rise in the total committed asset-based credit lines in the first quarter of the year 2012 in comparison to the previous quarter. Also, as compared to the earlier year, the total credit commitments were up by as much as 7.3%. Moreover, there was an increase in the new credit commitments in more than half of asset-based lenders by almost 55 per cent.
In the first quarter of the year 2012, the utilization of asset-based lender's credit has jumped to 40.85. The rise was 39.4 per cent in the previous quarter. And in the same quarter in the year 2011, it was 39.1 per cent.
Brian Cove, the CFA'S chief Operating Officer points out that the asset based lenders will continue to take the fore front as the primary source of growth and working capital for the United States as they have managed to maintain throughout the credit crisis and through the recession, if the economy continues to prosper with the same rate.
Asset-based lending comprises of many kinds of loans that can be granted to a borrower wherein some kind of assets serve as the security.
Factoring & asset based lines of credit are the two-common type of asset-based loans which are practiced.
Factoring loan, a factor or a financial institution comes into play which buys the outstanding accounts receivable of the business. Thus, factoring is not a typical kind of loan as it involves sale of receivable and a direct third party involvement in the business. The lending amount that is generally granted by the factor ranges between 70 to 90 percent of the value of the account receivable when this purchase is made.
A factoring fee is taken from the remaining amount and the balance is released when the invoices are collected. Factoring fee can be anywhere between 1.5 to 3 percent, based on risk profile. This fee depends on factors like the risk involved and the number of days for which the funds issued will be used.
A factoring agreement gives freedom to the business to choose which invoices it wants to sell to the factor. Once an invoice is sold, the factor manages the receivable and related collection. The factor becomes a de facto credit manager for the business and performs credit checks, manages payments and other related tasks. The documentation of these payments and analyses of credit reports also becomes the responsibility of the factor.
A Line of Credit loan is more of a typical bank loan with certain notable differences. A traditional loan can be secured through collaterals like equipment, personal assets or real estate, but A/R lending is restricted to securing the loan through trade outstanding account receivable. Under the account receivable lending arrangement, each draw by the borrower results in generation of a borrowing base against which the business can borrow. The lending institution charges a collateral management fee against the outstanding amount. If the funds are advanced, the borrower is charged interest only on the amount which has been borrowed.
An invoice can contribute towards a borrowing base only it is less than 90 days old. There are other eligibility conditions to A/R financing that can be exercised by the lender. These include cross-aged, government customers, international customers and concentration limits on a particular customer. Sometimes, if a particular customer has a higher share in the collateral, the lender can choose to do a background check on that customer to decide the credit worthiness of the business.
