Ledgered lines of credit (LLOCs) are gaining traction as a financing option for larger small businesses and mid-sized companies. They combine the receivables-based structure of invoice factoring with the revolving format of an asset-based loan (ABL) or bank line of credit. Ledgered lines of credit offer several advantages for growing companies, including:
1. Improved cash flow
The primary benefit of a ledgered line is that it improves your cash flow. The line can provide the working capital needed to meet your obligations, enabling you to manage the company more strategically.
Ledgered lines use a revolving structure, allowing you to draw funds as needed. The balance is repaid as receivables are collected. This structure gives you continued access to working capital as your financing needs change.
2. Simpler qualification requirements
Ledgered lines have simpler qualification requirements than asset-based loans and bank lines of credit. Requirements include:
3. Simpler application process
Ledgered lines of credit have a simpler application process than comparable products. Additionally, they don’t usually require the lengthy collateral examinations that asset-based loans may require.
Along with the funding application, the company must provide up-to-date financial information, such as:
4. Easy access to funds
Accessing funds from an LLOC is relatively simple. Most lines don’t require the borrowing base certificate used with asset-based loans. Instead, your company can draw funds from the line by submitting a list of invoices (i.e., the sales ledger) to the financing company. Funds are usually deposited into the company’s bank account within a business day.
5. Competitive rates
The all-in financing rates for a ledgered line of credit are competitive. Rates typically fall between those of a receivables-backed ABL and a factoring line of comparable size.
The financing cost of the line is based on the Prime rate plus an additional margin, called the spread. 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 financed.
6. The line scales as you grow
LLOCs are flexible and designed to grow with your business. The main requirement to get a line increase is to have customers with good commercial credit and meet the financing company’s criteria for eligibility. Most line increase requests can be processed in a couple of days.
7. Minimal redundant controls
An important advantage of a ledgered line of credit, especially compared to invoice factoring, is that the facility does not have the redundant controls that are built into factoring lines. This structure makes the line more user-friendly for both you and your customers.
Note: Finance companies still monitor their collateral regularly; however, the facility relies more heavily on the company’s internal financial controls and reporting.
8. It’s designed for mid-sized companies
Ledgered lines of credit are designed for growing mid-sized companies that have outgrown factoring. They can be a good fit for companies that want a revolving line backed by their A/R without the extensive reporting and compliance requirements of an ABL.
9. Works in challenging situations
Ledgered lines of credit can work well for companies that have strong accounts receivable but do not meet all the requirements of a conventional lender. These can include growing companies, businesses undergoing a turnaround, or companies that have been placed in a lender’s Special Assets group.
The facility is primarily supported by eligible accounts receivable. Consequently, lenders can place greater emphasis on receivable quality, financial controls, and the company’s ability to manage A/R effectively.
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Marco Terry is the Managing Director of Commercial Capital LLC and has over two decades of experience in asset-based finance. He has worked with small and mid-sized companies across the United States, Canada, and Australia. Marco holds a Master of Science in Finance.