Can AR Financing Supplement a Bank Loan?

The good news first – the answer is “Yes”!

 

The bad news is that incumbent lenders (i.e. banks) typically won’t agree to the conditions necessary to enable it to become a reality.

 

Let’s start first with what an A/R lender or factor typically needs to offer financing – which is at least a first lien position on the assets against which it is lending (i.e. the A/R).  Sounds reasonable enough right?

 

In fact, many A/R lenders (us included) do not even require a blanket first priority lien against all of the A/R of a company – in favor of a first priority lien on the A/R only against which we are lending.  In practice this generally works by having the A/R lender provide financing against receivables from only selected customers of the borrower.

 

So how does one “carve out” certain receivables to permit an A/R lender to finance them?  We know that many of our competitors make this process complicated, but we don’t!  We simply require the incumbent lien holder to sign a simple one-page waiver permitting the borrower to sell certain A/R to us from time to time and releasing any and all collateral claims the bank might have against those A/R.

 

So will a bank typically sign a waiver releasing some or all of their A/R collateral?  As mentioned above, the answer is frequently and unfortunately “No”.  And the reason is pretty simple from the banks point of view – which is – that they are relying on all of the collateral to support the loan that they have made to the company – and that releasing some of that collateral makes them worse off.  Indeed, we agree that the banks position on this is entirely rationale.

 

So does all this mean the topic is not worth pursuing at all?  Not at all.  We think it is worth pursuing because there are enough potential circumstances available that may give rise to a bank making an exception – so it is worth presenting to them.  Here are some of the exceptions we see as working most often:

 

  1. If the incumbent loan is a SBA loan, the process of releasing the A/R and related collateral can be done in a way that does not impair the SBA guaranty – so the bank will look to the SBA guaranty foremost – and often will not find it a material risk to release on the A/R.
  2. If there is significant other collateral pledged to the loan (i.e. property, etc.) and the credit profile of the borrower has improved since the bank loan was originated.  In this circumstance it is more likely, however, that the bank will offer more availability.
  3. If the bank loan is under collateralized due to eroded conditions and the company finds itself stabilized but cash strapped – and the bank is unwilling to extend additional credit.  In this situation the banks best hope for a good outcome may be stabilized cash flow to repay their loan – and the bank may not be willing to risk new money to provide working capital – A/R financing companies will often be willing to offer risk capital in these situations.

 

Some thoughts on incremental liquidity options.  Hope this helps.