How do I move from factoring to an asset-based line of credit?

What actually changes

Factoring and asset-based lending both turn receivables into cash, but the legal machinery is different, and the move from one to the other is a change of machinery. A factor buys your invoices, notifies your customers and has them pay the factor directly. An asset-based lender lends against a pool of receivables you still own, and your customers pay an account in your name that the lender controls. Factoring vs asset-based lending covers the choice; this page covers the move.

The savings that motivate most moves come from the cost row: interest on what you use instead of a discount on every invoice. The price is discipline. An asset-based lender expects monthly financials, a borrowing base certificate on a set schedule, a field exam before closing and periodically after, and covenants that a factor never asked for.

When a factored business is ready

Factors buy invoices largely on the strength of the customer who owes them; the seller's own condition matters less. Asset-based lenders look at both. A business is usually ready to move when these hold:

• The books close monthly on an accrual basis, and the receivables in the ledger tie to the aging and to the bank statements. A lender cannot build a borrowing base on figures that reconcile only at year end.
• Losses have stopped or are clearly narrowing. Asset-based lenders will finance a business with losses more readily than cash-flow lenders will, but they want to see the trend and a reason to believe it.
• The receivables book is large enough for the lender's fixed costs of field exams and monitoring to make sense, and diverse enough that concentration caps, commonly 20% to 25% of eligible receivables for any one customer, do not strip out most of it.
• The aging is clean. Receivables more than 90 days past invoice are typically ineligible, and a high rate of credits, returns or disputes shows up as dilution that lowers the advance rate.
• There are no tax liens or unpaid payroll taxes. A federal tax lien primes much of the collateral, and most lenders will not close over one.

Asset-based lenders typically advance 80% to 90% of eligible receivables. The number to compare with your factor is not that rate but the availability it produces on your actual book, after ineligibles, concentration caps and reserves, set against what the factor funds today, net of its own reserve. A book full of slow or concentrated invoices can produce less availability under an ABL than under a factor, even at a higher headline rate.

The closing, step by step

Every step below depends on the one before it, and the factor controls several of them. Start by reading the factoring agreement: its term, its renewal and notice provisions, any minimum-volume commitment and any early termination fee. Many agreements renew automatically unless notice is given inside a window, and missing it can add a fee to the payoff. What it costs to exit an ABL early covers the same issue from the other side.

The payoff letter states what the factor is owed on the closing date: outstanding advances on purchased invoices, accrued discount and fees, and any termination charge, less the reserve the factor is holding for you. It should also state what the factor will do on receiving the money: reassign the purchased invoices to you, file a UCC-3 termination, and forward any payment it receives afterward. How a payoff letter works walks through the terms to check.

The lien. Factors file a UCC-1 against receivables, and often against all assets. Until the factor files the termination, the new lender's search shows a senior claim on its collateral. Most lenders fund against the payoff letter's promise to terminate, and follow up until the UCC-3 is of record. If a cash advance or earlier lender also has a filing, it has to be cleared at the same closing; see UCC blanket liens.

Redirecting customers and bridging the cash gap

This is the step owners underestimate. Your customers' payables departments were told in writing to pay the factor, and many set up the factor as the remit-to on their vendor record. A new letter from you asking them to pay somewhere else looks, to a careful payables clerk, like the fraud they are trained to refuse. Expect some customers to keep paying the factor for a cycle or two.

• Have the factor sign the redirection letter with you, or send its own release. A letter from the party customers were told to pay carries the authority yours lacks.
• Call the largest payers before the letter arrives, and ask what their vendor-change process requires: a new W-9, a signed bank letter, a form of their own.
• Put the forwarding obligation in the payoff letter, with a timeframe, so payments reaching the factor after closing come to the new lockbox rather than sitting in a suspense account.
• Reconcile weekly for the first months: every customer, which account it paid, and what is still in transit.

The cash gap has two sources. Misdirected payments reach you late, and until they arrive the invoices behind them age in the new lender's borrowing base; past the lender's cutoff they drop out. And the first borrowing base is set after the field exam, which may exclude invoices the factor was happy to fund. Model availability week by week for the first two months, using the lender's eligibility rules on your real aging, and hold back a cushion of availability or cash until collections settle. Cash dominion and lockboxes explains how collections flow once they do.

The switch changes customer payment instructions and the timing of cash. Plan it with a closing checklist and a weekly cash forecast, not a phone call.

Why SBA is not the exit, and what is

SBA will not refinance a factoring agreement, so a 7(a) loan cannot be used to pay off a factor. A business may have an SBA loan for other purposes, such as equipment or real estate, but SBA money is not the route out of factoring. The routes that work are an asset-based line from a bank or a non-bank lender, and occasionally a bank line with a receivables borrowing base for a company whose earnings already support it. Bank vs non-bank ABL covers which suits whom: banks price lower and ask for more in coverage and history; non-bank lenders accept thinner earnings and charge for it.

A business not yet ready for either can use the time to become ready: close the books monthly on an accrual basis, tie the receivables ledger to the aging, work down disputes and old invoices, and build twelve months of monthly financials a lender can test. Recourse vs non-recourse factoring matters here too, because the kind of agreement you have shapes what the factor holds back and what you owe it at exit.

Preparing the file

The documents are Transparent's line-of-credit checklist, plus the factoring paperwork:

• An AR aging by customer, with days outstanding
• An AP aging
• A balance sheet and P&L, and a year-to-date P&L through last month-end (optional)
• A debt schedule and UCC position: every existing lien, including the factor's
• An inventory report, if inventory is part of the borrowing base (optional)
• Bank statements (optional)
• Business tax returns for two to three years (optional)
• The factoring agreement and the factor's latest statement of purchased invoices and reserve

Transparent reads the aging against typical eligibility rules before any lender does, so the availability the file shows is the availability a lender will find. The book holds 235 lenders that write asset-based loans and lines, and 116 that write factoring, which matters when the honest answer is that the business needs another year with a better factor first.