Helping Exiting Clients Determine the Type of Alternative Financing Best for Their Businesses
The Differences Among Asset Based Lending, Factoring and Fintech
After the last recession, even after the economy began to improve, banks were still lending very conservatively. To fill that void, Fintech companies emerged. These lenders lend on cash flow, typically on amounts under $250,000. Part of the allure of Fintech is the speed of a seamless approval and funding process. But business owners should be cautious because these loans are expensive and most have a daily repayment structure. If you do go to a Fintech lender, you need to understand going in exactly what has to change in your business to allow you pay back the loan; otherwise, you can very easily get into trouble. It’s like a drug; you get dependent on it and as you pay the loan down, the business gets more strapped for cash so you take another loan and it can go on and on.
The best way to use a Fintech lender is when your business is doing okay but you have a customer with a big order on which you’ll make a nice profit. You need a chunk of cash to fill the order; a one-time loan that you will pay back as soon as your customer pays you. In other words, you’re in and out. Fintech financing is great when a company has an urgent need not an ongoing one such as when you’re short on payroll.
Factoring is another source of lending where a business sells its accounts receivable (invoices) to a third party (called a factor) at a discount. A business will sometimes factor its receivable assets to meet its present and immediate cash needs. This type of lending is good for borrowers with high concentrations and if the factor is comfortable with the borrower, won’t cap the amount they’ll lend. This scenario lends itself better to certain industries such as the garment industry, soft goods (furniture) and trucking. Important to note is that factors usually do not lend against inventory or equipment.
In contrast to Fintech and factoring, asset based lending is another source of financing. It is more mainstream (similar to bank financing) and less intrusive on the business than factors who when they buy a receivable, contact the customer directly; and Fintech who is in the business’ bank account every day. While more expensive than bank financing (because asset based lenders take on the risk banks won’t take), it is considerably less expensive than Fintech or factoring. In addition, more asset classes (inventory and equipment) can be financed through an asset based lender and it is a seamless process for a business’ customers.
Asset based lending is a great stepping stone back to bank financing. It gives a business an opportunity to improve the business by fixing the issues that got it in trouble in the first place and be stronger for it.
About Celtic Capital
Companies looking for working capital to cover operating expenses, fund growth, increase buying power and take advantage of vendor discounts and rebates turn to Celtic Capital. With an appetite for the more complex transactions, Celtic Capital has a history of success in crafting creative, flexible asset based financing solutions from $500,000 to $5 million with no financial covenants.
As an independent lender, working with companies nationwide, Celtic Capital is willing and able to alter price and deal structure and expand lines of credit to handle its clients’ increased revenues; and when cash flow is an issue, will look toward providing an inventory facility to help offset lost cash flow.