Revolving lines of credit are secured by the borrower's receivables and/or inventory. Typically, this type of financing is used to increase cash flow and working capital. Because the borrower's
customers are generally not notified of the assignment of their accounts to the lender, the borrower continues to service its receivables. The borrowing arrangement is usually transparent to the
borrower's customers. Advance rates for lines of credit secured by accounts receivable depend on credit worthiness and the amount of dilution (returns, uncollectible, etc.) that the borrowers company
experiences, but typically range from 75% to 85% of the outstanding Accounts Receivable. Advance rates for lines of credit secured by inventory depend on the future orderly liquidation value of your
inventory and the level of inventory relative to the amount of your accounts receivable outstanding, but typically range from 30% to 65% of the cost of inventory. Financing rates are based on a
borrower's financial profile and market conditions.
Factoring is the preferred method of working capital financing for companies that cannot afford to have cash tied up in receivables for more than 30 days. Factoring is typically used when a
company cannot qualify for a more traditional type of financing as in the case of start ups, turn-a-rounds, and companies with little net worth. Because factoring is based on the strength of the
receivables rather than the company, it is ideal in these situations. Factoring eliminates the time and expense of collecting receivables. Factoring differs from traditional accounts receivable
financing in that the lender (factor) actually purchases the invoices directly from the company on either a recourse or non-recourse basis. After the sale, the receivables, balances are carried on
the factor's balance sheet since title has passed. Because the factor then owns the receivables, it generally provides all the required credit, collection, and accounting services necessary to
collect the receivables. The important difference between factoring and traditional accounts receivable financing is ownership. In factoring, the receivables are purchased and owned by the factor. In
a traditional accounts receivable lending arrangements, accounts receivable are pledged to the lender as security for the loan, but the borrower retains ownership and complete control of the
receivables and the value of the receivables remains on the borrower's financial statement.