Hybrid Product Success: Blending a Line of Credit with an Accounts Receivable Purchase Line

Introduction:

The eRevenue® web-based software platform is completely flexible and thus able to deal with a variety of working capital lending situations. This case study will highlight a hybrid product that operates exclusively on the eRevenue® system— the Blending of a Line of Credit with Accounts Receivable Purchasing. This hybrid application recently enabled a lender using the eRevenue® system to successfully deal with a working capital need of a large commercial customer. With permission, here is their story:

(For privacy purposes, the name of the lender and their client has been changed.)

Real-life Application:

Alpha Fixtures, Inc. had a $75,000 line of credit with 1st Community Bank secured by accounts receivable, inventory, and a personal guarantee from the owner. For the most part, Alpha Fixtures was able to handle their working capital needs with the $75,000 line of credit in conjunction with their receivables collections. However, each year Alpha’s business spiked in late Fall and in early Spring. During these seasons, the $75,000 credit facility was insufficient to cover Alpha’s working capital needs. Recognizing their seasonal demands for working capital, Alpha requested a larger credit line with 1st Community Bank, who was using the ABL function of the eRevenue® system to administrate their ABL line.


Although Alpha was a good client that 1st Community Bank wanted to help, Alpha Fixtures did not have an on-going borrowing base to support a line of credit increase up to the $200,000 level they needed during those seasonal jumps.

Recognizing they could not increase the ABL line, 1st Community Bank did an in-depth analysis of Alpha’s main customers. It was discovered that Alpha had several Fortune 500 companies with which they did business. Three of Alpha’s customers had very high credit ratings as well as substantial invoice balances during Alpha’s spiked seasons. Therefore, 1st Community Bank utilized the invoice purchasing capability of the eRevenue® system to structure a hybrid product for Alpha, giving them the working capital they needed during their seasonal spikes, while simultaneously keeping 1st Community Bank in total compliance.

Deal Structure:

In looking at the balance of the receivable base as well as the inventory securing the line of credit, it was determined that the borrowing base of Alpha was sufficient without receivables from customers X, Y and Z. Additionally, the line of credit was monitored daily by the eRevenue® system to assure the line balance was covered at all times. This freed the receivables of customers X, Y, & Z, enabling them to be purchased by 1st Community Bank under an accounts receivable purchase line agreement.

Therefore, 1st Community Bank left Alpha’s $75,000 working capital line of credit in place secured with accounts receivable (excluding receivables from customers X, Y and Z), inventory, and a personal guarantee of the owner.

In addition, 1st Community Bank set up a $125,000 accounts receivable purchase line for Alpha Fixtures secured by receivables from Customers X, Y and Z. 1st Community Bank actually purchased the receivables of Alpha’s customers X, Y and Z according to the terms of the receivables purchase agreement, earning the contract stipulated discount fees and interest.

Win-Win:

This deal structure enabled 1st Community Bank to supply Alpha Fixtures with the working capital they needed to fulfill the orders they had during their peak seasons. When the peak season ended and the receivables were collected, the Accounts Receivable Purchase Line remained dormant until the next peak season.

Alpha Fixtures was thrilled with the solution provided by 1st Community Bank, thus cementing a long-term client relationship. Additionally, 1st Community Bank increased their yield by 17% per year by adding the additional accounts receivable purchase line.

Summary:

1st Community Bank utilized the functionality of eRevenue® system in a very clever way to meet a working capital demand of a commercial customer. Since the line of credit and the accounts receivable purchase line were both running on the same eRevenue® system, being administrated and monitored seamlessly, 1st Community Bank was able to pull aggregated reports and have a clear vision of Alpha's business cycle at all times with total visibility and compliance.

If you feel this type of a hybrid product would work in your portfolio structure, here are some ways to identify candidates for this type of program:

• Companies that have an adequately secured line of credit relationship with a bank
• Companies that have receivables to very creditworthy customers
• Companies that have seasonal demands for working capital or companies experiencing rapid growth whose borrowing base has not yet caught up to their growth