Many well-established government contractors turn to Asset Based Lenders (ABL) for capital.
ABLs provide commercial financing to companies primarily using accounts receivables as collateral. Typically the Contractor will have a minimum of $1 million in available accounts receivable (AR) for funding. This means the creditworthiness of the account debtors (customers) is strong and diversified (not concentrated into one or a few customers.)
In this credit market there is strong competition for a loan of this size, so companies can leverage that competitiveness to get a good deal. The fees begin at the very start with a non-refundable due diligence application fee. This can run anywhere from $1,000 to $10,000 – a big spread which has a lot to do with how much legal work will be required to close the loan. If there is significant “hair” as the lenders call a deal with problems, then the application fee is even higher.
The application process produces a term sheet which identifies the rates and terms of the actual loan. Again an ABL would probably have a one-time origination fee – from .25% up to 1.5% of the loan amount paid at closing. Then another “service fee” which is another .25% to 1.5% of your total available AR paid monthly. On top of that would be your “interest charge” which is an ongoing daily interest charge for “funds in use,” meaning whenever you draw on the credit line the outstanding balance accrues interest charges. Additionally there may be minimum usage fees, where if you are not borrowing a minimum amount you get charged a fee.
Other fees include a four times a year onsite audit charges, cancelled checks, wire fees and a whole host of little charges you need to ask the ABL about.
At the end, what you are looking for is the “all in” cost of borrowing money. Since each ABL lender structures their deal uniquely, the “all in” is the best way to compare what you are getting. On an annualized basis a strong deal with good credits and clear history will run in the high single digits up to the low teens percentage-wise. A deal with lots of problems (unpaid taxes, old loans to pay off, complicated ownership etc) can run into the high teens up to a low twenties annualized interest rate.
Lastly, in working with lenders – rate isn’t the end all be all. Make sure that the working relationship is congruent with how you operate.
Wild demands can cast you far afield and add stress and complications to your life – but hey, the rate was cheap!