Sales ledger financing is gaining traction as a financing option for mid-sized companies that are in good financial shape and are growing quickly. This solution is offered to companies that have outgrown conventional invoice factoring but are not able to meet the qualification requirements of a line of credit.
Sales ledger financing offers a number of advantages to businesses, including:
1. Improved cash flow and increased sales
The most important benefit of a sales ledger financing line is that it improves your cash flow – often very quickly. This benefit allows you meet your obligations, enabling you to manage the company more strategically.
Additionally, sales ledger financing lines can be used as a platform for growth. Your company can now offer payment terms to clients without having to worry about the impact that slow payment have on your cash flow. When used correctly, this solution enables you to pursue strategic clients and increase your revenues.
2. A simple application process
Applying for a sales ledger financing line is relatively simple and does not require all the formalities of applying for a line of credit.
Aside from submitting an application for funding, the company must include up-to-date financial statements, such as:
- Profit and loss statements
- Balance sheet
- Accounts payable aging
- Accounts receivable aging
- Sales ledger (also called an open invoices report)
3. It’s easier to get than a line of credit
Lines of credit are great – if you can get them. The problem is that meeting the qualification requirements of a line of credit is very difficult. The company must have impeccable financial statements and plenty of assets. It must also meet strict lending covenants and have owners whose personal assets can be pledged as collateral.
Getting a sales ledger financing line is much easier. The company must be profitable or have a short path to profitability. Its financial statements must be reasonably good, and the company must have credit-worthy commercial clients in its ledger.
4. An easy funding process
The funding process is straightforward. To get funded, the client submits a copy of the current ledger to the financial institution. Funds are usually deposited to the company’s bank account within a business day.
5. Competitive rates
The all-in financing rates for a sales ledger financing line are extremely competitive. Rates fall somewhere between the rates for a line of credit and the rates for a factoring line of comparable size.
The financing cost of the line is based on the WSJ prime rate plus a small incremental cost. This structure is commonly referred to as “prime + x%.” Additionally, some lines have a monthly maintenance fee based on the face value of the receivables being financed.
6. A facility that grows with your sales
Sales ledger financing lines are flexible and designed to grow with your business. The main requirement to get a line increase is to have clients in your ledger with good commercial credit. Most line increase requests can be processed in a couple of days.
7. Minimal redundant controls
An important advantage of sales ledger financing, especially compared to invoice factoring, is that the facility does not have all the redundant controls that are built into factoring lines. This advantage makes the line more user friendly for both you and your customers.
Note that lenders do check their collateral regularly; however, they also use controls similar to those offered by lines of credit.
8. It’s designed for mid-sized companies
The facility is designed with mid-sized companies in mind. When used strategically, sales ledger financing can serve as a stepping stone to better and more flexible financing solutions, such as commercial lines of credit or asset-based loans.
Who qualifies for sales ledger financing?
To qualify for a sales ledger financing program, your company must:
- Invoice a minimum of four million dollars ($4,000,000) per year
- Have customers with good commercial credit
- Have good sales backup documentation
- Have good internal controls
- Have reasonably good financial statements
- Be profitable, or have a near-term path to profitability
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