What it takes to move from factoring to a bank ABL.

A lot of owners who factor would rather have a bank line. They want the freedom that comes with it: collecting their own receivables, drawing what they need when they need it, and not selling every invoice to get paid. Most of them have never been told what it actually takes to get there.

Factoring vs ABL: two different animals

When you factor, you sell your invoices. The factor approves your customers, advances you most of each invoice, holds the rest in reserve and usually collects from your customers directly.

An asset-based line of credit, or ABL, is a loan. A bank lends against a borrowing base: a share of your eligible receivables, and sometimes your inventory. You draw on the line when you need cash and pay it down as customers pay. Your customers stay your customers, although their payments typically land in an account the bank controls. It is debt on your balance sheet, and it comes with reporting and covenants a factor never asked for.

What a bank will want to see

• Financial statements the bank can rely on: year-end statements from a CPA, plus monthly numbers during the year
• Tax returns that tie to those statements
• A clean A/R aging and A/P aging, customer by customer
• Who your customers are, and how much of your revenue sits with the biggest ones
• A schedule of every loan, lease, advance and lien against the business
• A business that makes money, or a clear explanation of why it did not and why that is over
• No unpaid payroll taxes or tax liens
• A plan for paying off the factor and releasing its lien

Get that package clean before any bank sees it. The first impression a credit team forms of your file is hard to undo.

An application is not an approval. Neither is a term sheet.

Just about every bank will give you an application for an ABL. You might even get a term sheet, or something that looks like one. That does not mean it is going to work out.

A term sheet is an outline, not a commitment. It still has to survive the bank's credit approval, a field exam of your books and receivables, and the loan documents. Every bank carries its own risks and its own appetite, and in this economy those appetites are tighter and change faster than they used to.

When a deal dies in credit, it rarely dies on day one. It dies after weeks of document requests, while you are still factoring and your renewal date keeps getting closer.

The bank has to fit your company

This is where most owners go wrong. They take the line from whichever bank says yes first.

A trucking company should not have an ABL with an oil and gas bank. Could it happen? Absolutely. But it is probably not the best fit, it probably does not come with the best rate, and the covenants can be difficult to live with.

A bank that already lends in your industry knows what your receivables look like, what a normal slow month is, and which of your customers are good for the money. A bank that does not will protect itself the only way it can: a smaller advance, stricter rules on which invoices count, and covenants written for somebody else's business.

Fit comes down to a few things:

• The industries the bank already lends to, and the ones it is pulling back from
• The size of line it wants. Too small and you are not worth its time. Too big and you are outside its limits.
• How it treats customer concentration and slow-paying accounts
• The reporting it will require, and how often
• The covenant package, and how much room it leaves you in a bad month

Read the covenants before you read the rate

The rate is one line on a term sheet. The covenants govern how you run the business for the life of the loan. Look for:

• Financial covenants, such as a fixed charge coverage test, and when they are measured
• Minimum availability: the cushion you must always leave undrawn
• Which invoices do not count: old invoices, invoices from related companies, and anything over a single customer's concentration limit
• Borrowing base reporting: weekly or monthly, and what happens if you are late
• Field exams: how often the bank sends someone through your books
• Cash dominion: when the bank starts sweeping your collections straight against the line
• Limits on other debt, equipment financing, distributions and acquisitions

Then run your worst month from the last two years through every covenant. If one breaks, you need a different structure or a different bank, and you need to know that before you sign.

Getting out of your factoring contract cleanly

• Read your factoring agreement for the notice window and the termination terms. They decide when you can leave. What to look for »
• The bank will want the factor paid off and its lien released at closing, so ask the factor for a payoff letter early.
• Know when your reserves come back. That depends on your agreement, and it affects your cash in the first weeks.
• Your customers need new payment instructions the day the bank line funds.
• Time the switch around payroll and fuel, not around the bank's calendar.

Where we come in

Our team came up on the factoring and asset-based lending side. We know which banks are lending to trucking, construction and the trades right now, and which one is going to fit the risk of your company.

We underwrite the file ourselves and take it straight to the lender's portfolio team, credit committee or final underwriting. And if you are not ready for a bank yet, we will tell you what to fix first.