AR facilities — comparing bank and non-bank lenders

Martin Macmillan
7 min readJan 31, 2023

Accounts Receivable (AR) credit facilities are a popular financing tool for mobile apps and gaming companies. But when founders and CFOs consider whether to seek a facility from a bank or a non-bank lender, the devil is in the detail. This post compares the pros and cons of bank AR facilities with non-bank lenders like Pollen VC, and highlights some of the factors to consider before putting an AR facility in place or renewing an existing one.

How bank facilities work

Bank AR facilities have been around for decades and have remained largely unchanged over the past 30 years. A company reports all of its accounts receivable at the end of each month by sending invoices and accounting reports to the bank, along with a borrowing base certificate. The borrowing base is the amount that can be borrowed against the company’s total amount of outstanding receivables subject to a number of deductions. Deductions include invoices that are beyond a certain number of days outstanding, specific types of counterparties (e.g. non-domestic U.S.). Once the headline borrowing base is calculated, a haircut will be applied to give the bank an extra cushion in case of non-recovery. This is typically set at 20%, or viewed another way, gives an advance rate of 80% against the value of receivables. Depending on the overall portfolio of invoices due, for many companies, an effective advance rate is between 65–75% of their overall outstanding receivables.

The problem with the bank’s approach

One of the biggest annoyances for mobile app CFOs is how clunky traditional bank AR facilities are to use — mainly due to the delays in verification, the paper-based approach taken, and a high level of manual reporting by the company.

Firstly, the borrowing base (amount of funds the bank is prepared to lend) is typically taken as a simple snapshot at the end of each calendar month, so the amount available to borrow can significantly lag the true receivables position. The verification of AR by banks is still a very manual process, requiring human verification of invoice data, etc. For app companies, breakeven periods on advertising spend can be as short as five days, meaning that a 30-day delay in verification of AR could result in up to six “lost” reinvestment cycles within a 30-day period. This additional money could have been spent on user acquisition (UA) and purchasing new ROI-positive cohorts. Simply put, most banks don’t understand the payment dynamics of digital marketplaces that don’t operate on a traditional invoicing paradigm. This makes it more difficult for banks to work with app and game developers using their established manual verification processes.

Secondly, the advance rate can mean that CFOs are constrained by how much money they can borrow and reinvest into more profitable activities such as UA. If an effective advance rate is only 65–75% of the available AR there is an opportunity cost to the borrower in not being able to access the remainder and invest it back into the profitable business model.

Bank AR lending largely takes the format of a one-size-fits-all approach. Non-verticalized relationship managers lack specialist knowledge of the apps and gaming industry which operate quite differently. Overall, bank AR facilities can be viewed as blunt instruments, which have not kept pace with the times.

How non-bank lenders work

By contrast, non-bank lenders started their business with a very different approach. Rather than mimic the style of the banks, fintechs have started out by trying to solve a problem in a specific vertical, and then purpose-built a solution for that industry. Often, and certainly in the case of Pollen VC, they offer first-hand experience of trying to finance a business in the space. This has given rise to a flurry of new start-ups with a sector-specific focus, and direct experience of what it is like to operate in that vertical.

We recognized early on that timing is critical in the mobile app and gaming sector. By building a technology platform where we are able to ingest sales data in real-time directly from app stores and mobile advertising networks, we are able to digitally verify a borrowing base daily instead of monthly.

In other words, we work 30 times faster than a bank.

The time advantage is recognized by savvy founders and CFOs, who understand that being able to draw funds faster means they can be reinvested faster into user acquisition, content creation, or back into the working capital operations of the company. In effect, the AR line becomes more of a liquidity management tool in the CFO’s armory.

Fees: Looking beyond the headline rate

As in any financial product, the devil is in the detail, and different products should be compared on an “apples with apples” basis. Bank facilities will often have a headline financing rate which is usually the number that stays front of mind as a financing cost. But underneath can lie a web of additional fees for set-up, administration, and undrawn fees on committed facilities that are not fully utilized. These all need to be factored in to show an effective cost of funding at all different levels of utilization in order for a CFO to make an informed decision. Equity warrants are often part of an AR deal, and the equity value at the current valuation should also be priced in to show an objective “true cost” calculation.

Headline financing rates offered by non-bank lenders may well be higher than the banks’. This is not surprising as banks lend money taken from their depositors, and the current average checking account deposit interest in the U.S. is currently just 0.06%. By contrast, non-bank lenders typically raise their capital from private and other institutional sources, so rates are typically higher, although not necessarily by much.

Savvy CFOs need to:

  1. Build a model to unpack the rates down to an effective all-in financing rate, and understand how this changes at various levels of utilization. All fees, equity warrants at current valuation, and unutilized scenarios need to be factored into the model.
  2. Consider the opportunity cost of the verification delay window. This can make a dramatic difference depending on the LTV recovery profile of the app or game being financed.

We understand it can be a lot to consider all these different factors, and so we created a free-to-use calculator to help you get to your true cost of AR. Check it out here.

Example

Let’s say a mobile game has a 90-day LTV recovery window where $1.00 invested turns into $1.60 on day 90. This equates to a 60% return on investment within a 90 day period or 20% per month.

The CFO of the gaming company is looking to reinvest as quickly as possible into this established UA investment formula to maximize the return from the user acquisition opportunity.

Scenario 1 — he has to wait until day 30 before accessing the AR via bank facility with manual verification

Scenario 2 — he can draw against AR every 7 days from a non-bank lender like Pollen VC with automated verification

If the CFO can draw against their AR to reinvest in new cohorts which will generate a 20% monthly return, and can do this 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.

But don’t just take our word for it. Use your own data with our LTV, ROAS, and cash flow finance forecasting calculator here.

Conclusion

Founders and CFOs considering AR financing for their mobile app/gaming company should apprise themselves of all the options and model the outcomes to find out what is the best fit for their business. Financing options should always be compared on a like-for-like basis to ensure 100% transparency.

In the mobile app and gaming world, it’s about more than just the headline cost of capital. The cost of not being able to access capital quickly with a bank can have a far greater impact than the difference in financing costs and operation overhead. Make sure you consider the practical and operational capabilities of your lender as well as the headline costs to make the most informed choice for your business.

We offer a number of free-to-use calculators and tools on our website to help app studios effectively model their options and outcomes.

This article was first published in August 2020, and has since been updated.

--

--

Martin Macmillan

CEO & Founder at Pollen VC - London, we provide devs early access to revenues earned from the app stores so they can rapidly reinvest https://pollen.vc