Latest / Cash Flow Conversations with Fexingo: Working Capital, Receivables, and Small Business Finance / How to Use Your Receivables as Collateral for Growth
Transcript
- Lucas: Luna, I want to talk about something that a lot of small business owners I talk to don't even realise they have access to — using your unpaid invoices as collateral to get a line of credit. Luna: You mean like factoring? Because factoring is basically selling your invoices for cash, but that's a different animal. Lucas: Right, factoring is selling them. What I'm talking about is borrowing against them. You keep the invoices, you keep the relationship with your customer, and a lender gives you a revolving credit line that's secured by your accounts receivable. It's a form of asset-based lending, and it's actually pretty common for larger companies, but smaller businesses often don't know it's available to them. Luna: So instead of selling the invoice at a discount, you're just using it as collateral? That seems like a better deal if you can get it. Lucas: Exactly. And the key difference is the cost. Factoring typically costs you somewhere between 1 and 5 percent of the invoice value per month. A receivables-backed line of credit usually costs you SOFR — that's the benchmark rate now — plus a spread of maybe 2 to 5 percent. Today that works out to roughly 7 to 10 percent annualised, which is far cheaper than factoring if you're not in a desperate cash crunch. Luna: So who actually offers these lines? Is it big banks, or fintech lenders, or both? Lucas: Both, increasingly. Traditional banks like Bank of America and JPMorgan have asset-based lending divisions that will do this for companies with maybe a million in revenue or more. Then you have fintech lenders like BlueVine or Fundbox that use technology to underwrite smaller businesses faster. The difference is that banks tend to want a more established track record, while fintechs might be willing to start with a smaller pool of receivables. Luna: But what does the lender actually look at? I mean, an invoice is only as good as the customer's willingness to pay. Lucas: That's the whole game. Lenders scrutinize three main things: your dilution rate, your concentration risk, and your aging. Dilution rate is the percentage of your receivables that never get paid — returns, disputes, bad debts. If your dilution rate is above 5 percent, lenders get nervous. Concentration risk means you have too many eggs in one customer basket. If one customer accounts for more than 20 percent of your receivables, the lender will likely exclude that customer from the borrowing base. Luna: And aging is pretty straightforward — invoices that are over 90 days old won't count for much. Lucas: Right. Most lenders apply a 'liquidation schedule' where invoices over 60 or 90 days are excluded entirely. They also apply a haircut or advance rate, typically 75 to 85 percent of the eligible invoice amount. So if you have $100,000 in eligible receivables, you might get a credit line of $75,000 to $85,000. Luna: So give me a concrete example. Let's say a small business does about $2 million a year in revenue. What could they expect? Lucas: Let's say they average about $300,000 in receivables at any given time. After applying a 20 percent dilution reserve and excluding any invoices over 60 days, maybe they have $250,000 eligible. At an 85 percent advance rate, that's about $212,500 in available credit. They can draw on that line as needed, and as they collect invoices and generate new ones, the line fluctuates. It's dynamic, which is perfect for a growing business. Luna: But there's also a risk, right? If your customers pay slow, you might not have enough new receivables to keep the line from shrinking. Lucas: Absolutely. That's the flip side. The line is only as good as the quality and speed of your collections. If your average collection period stretches from 45 to 60 days, the lender will notice and might reduce your advance rate. But if you manage it well, it can be a really efficient growth tool. One of the things I like about it is that it aligns incentives — the faster your customers pay, the more credit you have access to. Luna: I can see why this would be attractive for seasonal businesses too. They have spikes in receivables during peak seasons, and they can draw down the line to cover payroll or inventory. Lucas: Exactly. A landscaping company might have $200,000 in receivables in July and almost nothing in January. The line would naturally expand and contract with their business cycle. That's much harder to get with a term loan. Luna: What about the paperwork? Is it a huge administrative burden? Lucas: It depends on the lender. Traditional banks might require monthly aging reports, and they might even do field audits once a year. Fintech lenders often integrate directly with your accounting software — QuickBooks, Xero — so they can see your receivables in real time and update your borrowing base automatically. The trade-off is that fintechs might have higher interest rates or fees. Luna: So what's the first step for a business owner who wants to explore this? Lucas: Start with your own data. Pull an aging report for the last six months. Calculate your dilution rate: take total credit notes and bad debts divided by total sales. If that number is above 5 percent, work on reducing it before you apply. Also look at your concentration: if any single customer is more than 20 percent of your receivables, that's a red flag. Fix those things first, and then approach a lender with clean, well-organized data. Luna: And if you're a small business that's been turned down by banks before, do you think fintech lenders are a good alternative? Lucas: I think they're worth a look, but be careful. Some of them have origination fees, monthly minimums, or personal guarantee requirements that can catch you off guard. Read the fine print. And one other thing — if you have a strong relationship with your bank, start the conversation there. Even if they say no, they might offer you a referral to their asset-based lending team. Luna: That's solid advice. And honestly, it ties back to something we've talked about before — the more you know about your own numbers, the more power you have in any negotiation. Lucas: Yeah, that's really the through line of this whole series. And speaking of that — if these conversations have moved your work forward in some small way, I want to mention something. A handful of listeners chip in monthly through buy me a coffee dot com slash fexingo, and that's literally what funds making this many episodes. No ads, no sponsors, just listener support. Luna: It's a small group, but it makes a big difference. We're able to keep the show independent and focused on what actually helps small business owners. Lucas: Absolutely. And if that's not for you right now, no worries at all. We're glad you're here. Now, back to receivables — one more angle I want to touch on is how lenders actually monitor your borrowing base once the line is set up. Luna: That's interesting because I imagine it's not a set-it-and-forget-it thing. Lucas: No, it's dynamic. Most lenders require weekly or monthly reporting, either through a portal or automated sync. They recalculate your borrowing base based on new invoices and collections. If you have a big customer that pays late one month, your available credit might dip. That can be stressful if you're counting on that line for payroll. Luna: So you need to have a buffer. Don't draw the line to the max every time. Lucas: Exactly. Treat it like a safety net, not a primary funding source. Use it for short-term needs — bridging a cash gap between paying suppliers and collecting from customers — not for long-term capital investments. If you need a new piece of equipment, a term loan or equipment financing is probably a better fit. Luna: This has been really eye-opening. I think a lot of our listeners will want to pull their aging report and start crunching numbers. Lucas: That's the goal. If you do that and find your numbers are solid, you might discover you have a hidden source of growth capital sitting in your accounts receivable file.