Should a company be looking at inventory finance, accounts receivable finance or both?
When inventory turns over as fast as it does in today’s computer equipment industry, it is rapidly converted into accounts receivable. As a result, many companies are finding that asset-based revolving lines of credit that include both inventory and receivables provide the perfect solution to their capital needs. They can finance the entire cash flow cycle of their product from the purchase of inventory through the collection of receivables.
Does a borrower pay a higher rate or additional fees for an asset-based loan?
The pricing on an asset-based loan is a function of the complexity and size of the transaction and the overall risk to the lender. On the basis of the cost to the borrower per dollar of credit extended, the effective cost of an asset-based loan may be higher than that of a conventional loan. This is primarily due to the costs incurred by the lender to conduct the periodic audits necessary to verify collateral values. However, the benefits of having more cash available to finance growth usually outweigh the slightly higher costs to the borrower.
What will the borrower need to provide the lender to get an asset-based line of credit?
A borrower will need to provide the same financial statements and company information required for a traditional loan application, as well as detailed reports on accounts receivable agings and inventory. In addition, the lender will likely conduct an initial on-site review of the borrower’s books and records, including the general ledger, subsidiary journals, invoices and other source documents required to confirm collateral reports and valuations. It is critical that the borrower maintain accurate and up-to-date records on its business.
How will the lender determine if there will be changes in advance rates or other terms of an asset-based loan?
An asset-based lender will conduct regular inventory audits and review accounts receivable levels as long as the credit line is active. They will look primarily at the quality of collateral and reporting procedures to evaluate whether there needs to be any adjustments to the advance rates or other terms.
On accounts receivable, lenders typically monitor the level of past due receivables and charge-offs, sales return/adjustment activity, customer concentration and credit quality, and the accuracy of customer aging reports. On inventory, lenders primarily look at age and turnover levels by product type and category, and the quality of inventory reports.
It appears that IT channel companies have a variety of options when it comes to obtaining financing for their business?
Yes, there are many finance options available in the channel and with cash flow as the lifeblood of every business, an asset-based loan structure often meets the needs of a high growth business.