The arrangement involves not only the company and the lender but also the customer and supplier as well

The arrangement involves not only the company and the lender but also the customer and supplier as well

Structures can vary, but often these advances are predicated on a higher advance rate relative to Senior Lenders against such collateral or assets. Loans made by Junior-Secured Lenders are typically considered Senior Debt with rights and remedies similar to first lien lenders, but with limits vis-a-vis first lien outlined in either an inter-creditor agreement or within a singular loan document with “waterfall” and other provisions addressing relative rights of the lenders. As a type of subordinated debt, Junior-Secured Lending has a lower priority around repayment than others when in default.

Merchant Cash AdvanceNot technically a loan, a Merchant Cash Advance is the sale of future credit card receivables

Invoice Financing Bill discounting involves a financial intermediary advancing funding against a company’s account receivable. The funder obtains a lien on the revolving accounts receivable but the company remains in control of the sales/receivable ledger and responsible for collection. The customer makes payment to the company and as such, the arrangement between the company and the funder is not known to the customer. The administrative charges, fees, and interest are calculated based on the risk of non-payment, payment history, and creditworthiness from the customer, rather than the company, to whom it is advancing payment.

Invoice factoring involves a funder who is placed between the company and its customer. The funder, commonly referred to as “the factor,” purchases a company’s accounts receivable at a discounted rate. The factor takes responsibility for the sales ledger (how much credit to a specific customer it will fund) and collection from the customer. The customer settles the outstanding invoice directly with the factor. Accordingly, the customer is generally aware of the factor arrangement in place. Like bill discounting, the factor looks to the creditworthiness and payment history of the customer, rather than the company from whom it is purchasing the accounts receivable, to determine the amount of discount and level of availability to allow for the sales to the individual customers.

Reverse invoice factoring is a supply chain accommodation usually arranged between a large manufacturing company and the factor to benefit smaller suppliers to the manufacturer, which originated primarily in the automotive industry. The manufacturer enters into an agreement with the factor to fund the supplier’s invoices immediately rather than have the supplier wait for the manufacturer’s normal payment cycle. The arrangement benefits the manufacturer by helping to stabilize its supply chain and the supplier receives its funding more quickly. These arrangements are generally only available to the supplier through its supply chain relationship with a large manufacturer or retailer.

Junior-Secured LendersJunior-Secured Lenders provide incremental financing against specified assets of a business pledged on a first lien basis to another Senior Lender

Purchase Order FinancingPurchase order financing (“PO financing”) is an advance from a lender that pays a company’s suppliers for goods the company is reselling or distributing to a customer. Funding under a PO financing arrangement requires a written purchase order against which the lender advances up to 100% of the purchase order costs. PO financing is typically used for large one-off transactions or to address seasonal supply issues. Typical fees and commissions for this type of financing fall between 1.15% and 6% per month.

A company receives a lump sum payment from the funder, which represents a percentage sale of future daily credit card receivables. The advance is repaid by the funder taking a percentage of the company’s credit card collections on a daily basis. Funding typically falls in the range between $2,500 and $250,000. With advance factors between 1.14 and 1.48, equating to interest rates of 15% to triple digits, it is one of the most expensive forms of financing.

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