Receivables financing: Easier than it looks
March 1, 1998 2 minutes read
Receivables financing: Easier than it looks
Don’t get bogged down in the technicalities
Private duty providers first entering the receivables financing world may be overwhelmed with its technicalities and nuances, says J.B. Dollison, managing director for StaffCapital, a Houston investment banking firm specializing in home care. But he says it involves just two basic transactions.
Account receivables may either be sold or borrowed against. In sales arrangements, sometimes called factoring, the home care company transfers its receivables’ title to the purchaser. In exchange, it receives cash payments for the discounted value of the purchased assets. The funding source collects the accounts, profiting on the difference between actual collections and the discount paid to the provider. Under lending relationships, private duty home care companies retain title to their receivables, which serve as loan collateral. The provider continues to manage the receivables; collected accounts reduce the outstanding loan balance.
Financing agreements typically last one to three years and allow providers to sell or borrow up to 80% of the value of their eligible receivables (usually accounts less than 90 days outstanding, but sometimes extending up to 150 days). The transactions are revolving credit lines; as a company generates receivables, the funding source advances cash.
Selling discounts and fees vary but can approach an equivalent 40% annual percentage rate. Loan interest rates differ based upon a provider’s size, its receivables profile, and general credit-worthiness, but range from the prime interest rate or LIBOR (London interbank offering rate) plus 1% to 3% for financially solid companies borrowing $5 million or more, to prime rates plus 10% for smaller organizations with less impressive earnings.
Selling arrangements are usually more costly than borrowing. However, depending on fee negotiations and the overall deal structure, the two can be very comparable. While either receivables financing mode may initially appear expensive, Dollison says it’s all relative.
Equity financing is not only more costly; it also potentially commands the high price of company control and ultimately even ownership. He adds that providers must also weigh financing expenses with the opportunity cost of foregoing growth because of lack of capital.
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