Q: I just read your article on commercial lending. For budgeting purposes, what should I expect to pay in interest for an asset-backed line of credit?
A: The primary driver for asset-backed loan pricing is the “quality” and volume of a company’s receivables and inventory. Banks and financing companies prefer to lend to businesses that sell products that don’t lose their value quickly due to fashion trends, spoilage or technical obsolescence. And they seek out businesses that sell to highly predictable customers that pay their bills on time.
Profitable businesses can negotiate better loan deals than unprofitable businesses. And businesses that borrow over $1 million will pay a lower interest rate than businesses that borrow under $500,000. Here are some rates to guide your specific projects.
For example, a first-time, non-SBA-backed $1 million accounts receivable line of credit with an advance rate of 75 to 80 percent — for a growing but not yet profitable company that sells to a healthy mix of Fortune 1000 companies plus regional companies — will likely pay an interest rate of approximately prime rate plus 2.5 to 5 percent. Some finance companies may quote variable interest rates based on Libor (London interbank offered rate) rather than the prime rate.
Businesses should expect to pay at least a 1 percent line of credit origination fee, plus an additional “application fee” or due-diligence-oriented “audit fee” between $5,000 and $10,000. In addition, most large banks and regional finance companies will charge a minimum monthly interest fee even if the business doesn’t draw on the line of credit.
Because of the variable cost of the origination fee and minimum monthly interest fees, I recommend that business owners avoid setting up first lines of credit that exceed their borrowing needs. It never hurts to negotiate deal terms and seek term sheets from competing banks and finance companies, too.