Using a Company’s Accounts Receivable to Finance its Purchase via Factoring
Facilitate a Business Sale with A/R Factoring
If you are looking to buy a business that has solid outstanding invoices, those unpaid invoices can be used as collateral to fund the purchase of the business. You can use the Accounts Receivable of the company you are trying to buy as collateral for a non-recourse invoice factoring facility. Also, many business purchases are funded using a business loan under the SBA 7a program. However, a problem with the 7a loan is that inventory and accounts receivable are valued at a very low advance rate. Smart SBA lenders will carve out the A/R to an accounts receivable financing company, like Bankers Factoring.
What Happens to a Businesses Accounts Receivable when Sold?
This is a very good question. Savvy business owners selling their business often include their accounts receivable or A/R as part of the business sales transaction as this can be tax advantageous to the seller. Buyers like including the A/R as this gives them working capital flowing into their new company from day one post-closing.
For most SBA lenders, the A/R that a company has to offer is not as favorable of a hard asset, like real estate, machinery, or equipment. The typical loan-to-value (LTV) for A/R is 10-20% of the outstanding accounts receivable for an SBA guaranteed loan. This can vary based on the credit quality of the applying business’ customers, the payment terms that are offered, and the customer concentration, but it is still a low LTV.
SBA lenders are often willing to carve out or release their security interest in accounts receivable. SBA Lenders will do this to enable a factoring company or an invoice financing lender like Bankers Factoring to provide a revolving line of credit in addition to an SBA Loan. While SBA loans can deal with credit scores of 650 or so, Bankers Factoring can look at clients’ scores down to 525.
As a small business owner, if you are thinking about selling your business, a good exit strategy is to have your business valued, arrange pre-financing for potential buyers with a combination of an SBA lender and accounts receivable factoring company, and have a tax minimization analysis done. With a certified business valuation and financing options in hand for potential buyers, it is easier to hold the purchase price when talking to potential buyers.
Buyers worry about having working capital and enough cash flow post-closing. A Bankers Factoring factoring line of credit can alleviate their worries and gives them ready access to cash on creditworthy B2B & B2G accounts receivable even with terms up to net 90 days. Accounts Payable are always a worry for business buyers and A/R financing gives you the working capital to keep AP under control. Buying a business using its own accounts receivable as collateral is a smart use of leverage without diluting your ownership.
How customer’s pay can be negotiating sticking point when trying to buy (or sell) a business. Having all the customer’s credit approved under a non-recourse A/R factoring facility removes a major deal hurdle. Buying a business using the targets company’s accounts receivable is advantageous for the business seller, SBA lender, and the business buyer.
Using A/R financing to buy (or sell) a business with solid business-to-business (B2B) or business-to-government (B2G) sales just makes sense on so many levels. Bankers Factoring will advance you up to 90% of your accounts receivable versus a 10% advance rate under SBA terms. And, we take the credit risk.