Using a Company’s Accounts Receivable to Finance its Purchase via Factoring
Table of contents
- Using a Company’s Accounts Receivable to Finance its Purchase via Factoring
- Using Invoice Factoring for Business Acquisitions
- AR financing can help both the buyer and seller of a business
Using Invoice Factoring for Business Acquisitions
Facilitate a Business Sale with A/R Factoring
Are you buying a business with open A/R invoices? Then you can use unpaid invoices as collateral to fund the purchase of the business. So, use the Accounts Receivable of the company you are trying to buy as collateral for a non-recourse invoice factoring facility.
Many business purchases have funds by claiming business loan under the SBA 7a program. However, a problem with the 7a loan is that inventory and A/R are valued at a very low advance rate. Smart SBA lenders will carve out the A/R to accounts receivable financing company, like Bankers Factoring.
What Happens to a Business’s 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 a tax advantage 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 is not as favorable as hard assets, 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.
Will SBA Lenders Carve Out A/R?
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 line of credit in addition to an SBA Loan. While SBA loans can deal with credit scores of 650, Bankers Factoring can look at clients’ scores down to 525.
Read more about the SBA subordinating to Bankers Factoring and turn outstanding invoices into cash flow on your new balance sheet.
As a small business owner, if you are thinking about selling your business, a good exit strategy is to have your business valued. You should also arrange pre-financing for potential buyers with a combination of an SBA lender and accounts receivable factoring company. Last but not the least, 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.
Business Buyers and Working Capital Worries
Buyers worry about having working capital and enough cash flow post-closing. A Bankers Factoring accounts receivable financing line of credit can alleviate their worries and give them ready access to cash. This is based on creditworthy B2B & B2G accounts receivable even with terms up to net 90 days.
Accounts Payable are always a worry for business buyers. A/R financing gives you the working capital to keep A/P under control. Buying a business using its own accounts receivable as collateral is a smart use of leverage without diluting your ownership via invoice factoring. The quality of the balance sheet items like accounts payable and accounts receivables can be sticking points for buyers and sellers. Accounts receivable financing from Bankers Factoring can alleviate those issues for a small business transaction.
AR financing can help both the buyer and seller of a business
How customers pay can be a 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 target company’s accounts receivable is advantageous for the business seller, SBA lender, and business buyer.
Using A/R financing to buy (or sell) a business with solid business-to-business (B2B) or business-to-government (B2G) sales 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 as your non-recourse AR financing company.