Over the years, finance companies have developed a set of solutions designed to solve the financing and credit needs of small and mid-size companies.
The three main types of secured lending are as follows:
• Factoring is a traditional solution for industries such as apparel, textiles, furniture, and home furnishings. Other industries that sell into retail channels, such as housewares, consumer electronics, and sporting goods, can also benefit from factoring. Companies that operate in these industries need a combination of credit protection, accounts receivable management, collections, and financing. Even though a company may be able to do this on its own, it’s often more cost effective to use a factor’s expertise and economies of scale.
• Asset Based Lending (ABL) is a form of financing used in a wide range of industries: manufacturing, services, retail, staffing, distribution, transportation, etc. As opposed to factoring, which provides a combination of services and often time purchases the receivable, the purpose of an asset based facility is simply to provide financing. An ABL facility establishes advance rates on certain assets such as accounts receivable, inventory, equipment, real estate, marketable securities, and even trademarks. Many companies are introduced to ABL when they hit a rough patch. However, healthy and growing companies can also benefit from utilizing an asset-based facility.
• Trade finance is a solution for companies requiring a “bridge” to finance their supply chain. The majority of these companies are importers that buy from suppliers located overseas, which require payment (full or partial) before shipment. Using an example of a vendor located in China, if the production time is 60 days, and the shipping time to arrive at a U.S. port is 30 days, the importer has to finance the product for 90 days before it can include it as inventory in its ABL or factoring facility. As such, providers of trade finance facilities lend against the value of the underlying purchase order, either from the start of production or from the time of shipment from the Asian port. For example, at CBC, our Supplier Early Payment Program will pay an importer’s supplier as soon as the goods are shipped and then provide up to 90 days for the importer to pay CBC.
When you are considering which option is the best fit for you, it is important to find a lender that is willing to spend time explaining each option in detail and understand your business to help you determine the right solution. If you are a banker, accountant, equity sponsor, or restructuring professional, it is vital to establish relationships with lenders that have the expertise, depth of knowledge, and reputation for providing the various types of secured lending.