Latest / Cash Flow Conversations with Fexingo: Working Capital, Receivables, and Small Business Finance / How a Credit Line Based on Receivables Works
Transcript
- Lucas: You've got fifty thousand dollars in invoices sitting unpaid. Your supplier wants payment in thirty days. Your bank account says you have twelve thousand. That's the classic small-business squeeze, and today we're talking about one specific solution — using those receivables as collateral for a credit line. Luna: So not factoring, where you sell the invoice. This is borrowing against it. Lucas: Exactly. It's called an asset-based lending facility, or ABL, secured by accounts receivable. A manufacturer I spoke with last month — let's call them Mid-State Components — they had about two million dollars in annual revenue and were carrying roughly four hundred thousand in receivables at any given time. Their bank offered them a revolving line of credit with a borrowing base calculated on those invoices. Luna: And how does the bank figure out how much they'll lend? It can't be one hundred percent of the receivables because some customers don't pay. Lucas: Right. The lender assigns an advance rate — typically seventy to eighty-five percent of eligible receivables. Eligible means invoices under ninety days old, not from a concentrated customer, not subject to disputes. For Mid-State, the bank used eighty percent against their three hundred thousand in eligible receivables, so they got a two-hundred-forty-thousand-dollar credit line. Luna: And they can draw on that line whenever they need cash, as long as they keep submitting their borrowing base certificate each month. Lucas: That certificate is the key document. It lists all outstanding invoices, their ages, and calculates the available borrowing amount. The lender audits it periodically — maybe quarterly — to verify the invoices are real and the customers are creditworthy. Luna: What kind of interest rate are we talking? Because this sounds like it could get expensive. Lucas: Typically SOFR plus three to five percent. So right now, with SOFR around five percent, you're looking at eight to ten percent annualized. That's cheaper than factoring, which can run fifteen to twenty percent, but it's more expensive than an unsecured line of credit — if you can get one. For a small manufacturer without years of profitability, this is often the only option. Luna: And the lender gets a security interest in the receivables, so if the business defaults, they collect the payments directly. Lucas: That's right. The borrower retains the customer relationship — the customer still pays the business, not a lockbox — but the lender has a lien. If a big customer is slow, say ninety days past due, that invoice might get excluded from the borrowing base, which reduces the available credit. Luna: So late payments don't just hurt your cash flow; they shrink your credit line too. That's a double whammy. Lucas: Exactly. And that's why Mid-State's owner started calling customers on day sixty instead of day ninety. He told me, 'I used to think of receivables as just money waiting to come in. Now I think of them as my credit limit.' That reframing changed his whole approach to collections. Luna: You know, this makes me think about the trade-off between control and cost. With factoring, you hand over the collection process, but you pay a premium and the customer knows you're using a factor. With ABL, you keep control, but you have to manage the borrowing base paperwork and the lender audits. Lucas: And that's exactly the decision a business owner has to make. One isn't universally better than the other. If you have a strong internal team and good customer payment habits, ABL is cheaper and preserves your customer relationships. If you're struggling with collections and need the cash immediately, factoring might be worth the higher cost. Luna: I'm curious — can you use ABL if you're a service business with retainer contracts, or is it really for product companies with traditional invoices? Lucas: Lenders prefer invoices with clear delivery terms — goods shipped and accepted. For services, it's harder to prove the work was completed, so advance rates are lower, maybe fifty to sixty percent. Some specialty lenders do it, but the borrowing base gets more restrictive. Lucas: Another nuance: concentration limits. If one customer represents more than, say, twenty-five percent of your receivables, the lender caps how much of that customer's invoices count. This protects them if that customer goes under. Luna: That would hurt a small business that relies on a big client. But it also forces diversification, which is probably healthy long-term. Lucas: Yeah, it's a guardrail. And look — these conversations are exactly why we keep the show free from ads and sponsors. We want to talk about the real trade-offs without any product pushing. If these episodes help you make better cash flow decisions, and you want to support that, you can buy us a coffee at buy me a coffee dot com slash fexingo. No pressure, just an option for people who find value here. Luna: It's a small way to keep the content independent. Appreciate anyone who does. Lucas: Back to the borrowing base — one thing that surprises owners is how often the lender recalculates. Mid-State submitted their certificate monthly, but the lender could adjust the line on a weekly basis if they saw deteriorating aging. That means the business can't just set it and forget it. Luna: Right, so you have to actively manage your receivables aging and customer creditworthiness. It's not passive liquidity. Lucas: Exactly. But if you do it right, it can be a flexible, low-cost source of working capital. And it scales with your revenue — as you sell more, your borrowing base grows. That's hard to beat. Luna: What's the minimum receivables size to make this worthwhile? A freelancer with ten thousand in invoices probably can't get an ABL. Lucas: Most banks want at least one hundred thousand in eligible receivables. Below that, the administrative cost eats the margin. But some online lenders go lower, with advance rates at sixty percent and higher fees. It's worth shopping around. Lucas: One final point: the borrowing base certificate is a legal document. If you overstate your receivables, that's fraud. Lenders do spot audits and they'll check sample invoices against shipping records and customer payment histories. Luna: So honesty is not optional. Good to know. Thanks, Lucas.