Accounts Receivable and Inventory Financing

This type of financing is has been called Asset Based Lending, Factoring, Contract Financing, Merchant Advance and other names. When lenders review a request for this type of financing they are mostly interested in the businesses clients and their ability to pay. They are the repayment source for the loan. The business simply fulfills the clients order.

A business will normally sell their receivables to the lender for an early advance. This speeds up cash flow for the business; however, lenders will discount the advanced amount. Don’t expect to get $1 for $1 with these lenders. Advance rates may be 60-90% of every dollar of receivables the lender purchases. Advance rates are also determined by a borrowing base. The borrowing base is made up of your receivables and your inventory on hand. Lenders will review your borrowing base monthly to make sure they have not given you too much money.

Some lenders will charge a 3% fee off the top just for providing the service, followed by an APR for the balance owed. The fees for this type of financing are high in relation to a normal line of credit. Normally there are significant contracts in place that make it difficult to quit using the lender once you get started. It is very important that you have an exit strategy before you engage one of these lending sources so you don’t become reliant on the lender.

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