AR facilities — comparing bank and non-bank lenders

For gaming and mobile app developers, accounts receivable (AR) credit facilities are a popular method of financing. However, the devil is in the details when founders and chief financial officers decide whether to apply for a loan from a bank or a non-bank lender. The advantages and disadvantages of bank AR facilities are contrasted with those of non-bank lenders like Pollen VC in this post, along with some of the considerations to make prior to establishing an AR facility or renewing an existing one.

How bank AR facilities operate

Bank AR facilities have existed for decades and have largely remained unchanged for the past thirty years. At the end of each month, a company sends invoices, accounting reports, and a borrowing base certificate to the bank to report all of its accounts receivable. Subject to a number of deductions, the borrowing base is the amount that can be borrowed against the total amount of outstanding receivables held by the business. Invoices that are overdue by a certain number of days and particular kinds of counterparties (such as non-domestic U.S.) are examples of deductions. A haircut will be applied after the headline borrowing base is calculated to provide the bank with additional cushion in the event of non-recovery. In other words, it gives an advance rate of 80% against the value of receivables, which is typically set at 20%. An effective advance rate for many businesses ranges from 65 to 75 percent of their total outstanding receivables, depending on the portfolio of invoices that are due.

The issue with the bank’s strategy

One of the biggest complaints from mobile app CFOs is how cumbersome traditional bank AR facilities are to use. This is mostly because of the company’s high level of manual reporting, paper-based approach, and delays in verification.

First of all, the bank’s borrowing base—the amount it is willing to lend—is typically taken as a simple snapshot at the end of each month. As a result, the amount that is available to borrow can be significantly behind the actual position of receivables. Bank AR verification is still largely performed by hand, requiring human verification of invoice data, among other things. A 30-day delay in AR verification could result in up to six “lost” reinvestment cycles within a 30-day period. Breakeven periods on advertising spend for app companies can be as short as five days. Purchases of new cohorts with positive ROI could have been made with this additional cash for user acquisition (UA). To put it simply, the majority of banks lack an understanding of the payment dynamics of digital marketplaces that do not operate according to a conventional invoicing paradigm. Because of this, working with app and game developers using banks’ established manual verification procedures becomes more challenging.

Second, CFOs may be limited by the amount of money they can borrow and reinvest in more profitable activities like UA due to the advance rate. There is an opportunity cost for the borrower in not being able to access the remaining amount and invest it back into the profitable business model if the effective advance rate is only 65–75% of the available AR.

The majority of bank AR lending follows a one-size-fits-all approach. Relationship managers who are not verticalized do not have specialized knowledge of the apps and gaming industries, which operate in very different ways. In general, bank AR facilities can be seen as blunt instruments that haven’t changed.

How non-bank lenders operate

On the other hand non-bank lenders began their businesses in a very distinct manner. Fintechs have started by trying to solve a problem in a specific vertical and then built a solution specifically for that industry, rather than following the banks’ style. In the case of Pollen VC, they frequently provide first-hand experience of attempting to finance a business in the sector. This has resulted in a flurry of new businesses with a sector-specific focus and direct experience of the business environment.

We quickly realized that timing is everything in the gaming and mobile app industries. We can digitally verify a borrowing base daily rather than monthly by developing a technology platform that allows us to ingest real-time sales data directly from app stores and mobile advertising networks.

To put it another way, we complete tasks 30 times faster than banks.

Educated founders and chief financial officers are aware of the time advantage and appreciate that it enables the company to reinvest funds more quickly in user acquisition, content creation, or working capital operations. As a result, the AR line becomes more of a tool for managing liquidity in the CFO’s arsenal.

Fees: The devil is in the details, and different

Products should be compared “apples to apples,” as is the case with any financial product. A headline financing rate, which is typically the number that comes to mind as a cost of financing, is typically included in bank facilities. However, there may be a web of additional charges for setup, management, and undrawn fees on committed facilities that are not utilized to their full capacity. In order for a chief financial officer to make an educated decision, these all need to be taken into account in order to demonstrate an efficient cost of funding at various levels of utilization. Equity warrants are frequently a component of an AR deal; additionally, the equity value at the current valuation ought to be priced in order to demonstrate an objective calculation of the “true cost.”

It’s possible that non-bank lenders’ headline financing rates are higher than banks’. This is not surprising given that banks lend money taken from depositors and that the average interest on deposits to checking accounts in the United States is currently just 0.06%. Non-bank lenders, on the other hand, typically obtain their capital from private and other institutional sources, resulting in rates that are typically higher but not necessarily significantly so.

Smart CFOs must:

Create a model that breaks down the rates to an accurate all-in financing rate and shows how this changes at different levels of utilization. The model must take into account all fees, equity warrants at the current valuation, and unutilized scenarios.

The verification delay window’s opportunity cost is something to consider. Depending on the app or game’s LTV recovery profile, this may make a significant difference.

We created a free calculator to help you determine the true cost of AR because we know that taking into account all of these different factors can be overwhelming. You can see it here.

Take, for instance

 A mobile game with a 90-day LTV recovery window in which $1 invested becomes $1.60 on day 90. This amounts to a 60 percent return on investment in 90 days, or 20 percent per month.

To get the most out of the user acquisition opportunity, the gaming company’s CFO wants to reinvest as quickly as possible in this tried-and-true UA investment strategy.

If the CFO can draw against their AR to reinvest in new cohorts, which will generate a 20% monthly return, and can do so four times faster in scenario 2, the gains made from rapid advertising reinvestment massively outweigh the interest costs saved by working with a slightly lower cost bank lender. Scenario 1: He has to wait until day 30 before accessing the AR via a bank facility with manual verification. Scenario 2: He can draw against AR every seven days from a non-bank lender

But don’t just rely on what we say. Our LTV, ROAS, and cash flow finance forecasting calculator can be used with your own data here.

In conclusion

founders and chief financial officers who are contemplating AR financing for their mobile app or gaming company ought to educate themselves on all of the options and model the outcomes in order to determine which option is the most suitable for their business. To guarantee total honesty, financing options should always be compared side by side.

In the world of mobile gaming and apps, it’s not just about the cost of capital in general. The cost of not having quick access to capital from a bank can be much higher than the difference between financing costs and overhead costs. To make the best decision for your company, make sure you take into account your lender’s practical and operational capabilities as well as the main costs.


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