As companies grow and scale, it’s important for them to have the flexibility to navigate the markets. Having multiple ways to manage assets and liquidity becomes critical.
Two prominent strategies in an organization’s toolkit are forward flow and warehouse facilities. Here’s what you need to know about the nuances of each of these options.
Understanding forward flow
Forward flow is a financial strategy in which a business sells its receivables upfront, quickly liquidating them to generate immediate cash. This approach is particularly useful for companies that need to maintain a steady cash flow to support ongoing originations.
In a forward flow arrangement, assets (typically receivables) are sold to an investor or financial institution at a negotiated price, often through a forward contract. This contract stipulates the terms and price of the asset sale and is designed to facilitate regular purchases, like monthly transactions, throughout the agreement.
A prime example of forward flow can be seen in the automotive lending industry. Car loans, which typically require monthly payments over several years, can tie up the capital businesses need to issue new loans. By selling these loans through a forward flow agreement, businesses receive immediate cash, allowing them to originate new loans without waiting for the long-term repayment process.
The primary benefits of forward flow include quickly converting assets into cash and reducing exposure to long-term risks. This near-term certainty enables businesses to make strategic decisions without the constraints of waiting for asset maturation. However, forward flow also means giving up the potential upside associated with the asset. By selling the entire risk/reward scenario, businesses trade future gains for immediate liquidity.
Understanding warehouse facilities
Warehouse facilities offer a different financial approach, allowing businesses to borrow against their receivables while retaining ownership and the potential for future gains. This structured loan arrangement is particularly appealing to companies that believe their credit underwriting is strong and prefer to capitalize on the potential upside of their assets.
In a warehouse facility, businesses pledge their receivables as collateral to secure a line of credit from a lender. The lender provides funds based on the value of the collateral (i.e., the borrowing base), which can be drawn upon as needed to support ongoing operations or new initiatives.
For example, a company with a portfolio of car loans might use a warehouse facility to borrow against these loans. This allows the business to generate cash flow while benefiting from the loans' long-term repayments and potential profitability. Unlike forward flow, where the assets are sold outright, a warehouse facility provides a way to leverage assets without giving up ownership. The primary advantages of warehouse facilities include retaining potential upside and having greater control over the assets.
Choosing between forward flow and warehouse facilities
Opting for a forward flow facility provides immediate certainty regarding the transaction. This allows you to make your next business decisions without being tied to the performance of the underlying assets.
A warehouse facility allows you to retain ownership of the pledged assets, meaning you benefit from the potential upside if everything performs as expected. If your credit underwriting is better than the bank’s risk assessment, you could make more money with a warehouse facility.
Here are questions you should be able to answer to make the best decision:
- What am I trying to accomplish? Do you want to maximize cash today or minimize the cost of carrying receivables throughout their lifetime? What are your goals and KPIs?
- What data do I have? How have your receivables performed in the past?
- What are my long-term goals? Make sure that the funding source you choose can accommodate your growth and changing business dynamics for the life of the loan—often 3-5 years.
When to choose forward flow:
- Businesses seeking immediate liquidity to fund new originations.
- Companies looking to reduce exposure to long-term risks associated with asset performance.
- Situations where near-term certainty and quick reinvestment are priorities.
When to choose warehouse facilities:
- Businesses confident in their credit underwriting and seeking to retain potential upside.
- Companies that prefer to leverage their receivables for ongoing cash flow while maintaining ownership.
- Scenarios where long-term asset management and flexibility are essential.
Keep in mind these facilities have different operational requirements. For a warehouse facility, borrowers track a borrowing base, follow covenants, and regularly show this information to lenders. New reports are required every time you want to draw down on the facility. In a forward flow facility, there's no borrowing base. Instead, you need to calculate things like a 6-month delinquency ratio, which is used to determine the purchase price.
Frequency of transactions is another key operational difference. Warehouse facilities might have drawdowns every 1-2 weeks, while forward flow transactions can happen daily, depending on how often receivables are sold. This means you track smaller batches and more frequent cash flows, often summarized in a monthly report showing current status, amounts owed, performance, and missed payments. For warehouses, the reporting includes a something similar to a waterfall report showing the pool of assets, borrowing base, and performance calculations.
Maintaining forward flow and warehouse facilities together
Sophisticated CFOs and heads of capital markets may combine forward flow and warehouse strategies to maximize flexibility and optimize cash flow. This approach allows companies to allocate assets to the best option based on current needs and market conditions.
A forward flow buyer might handle a smaller amount of receivables (e.g., $10M a month), while a warehouse can handle much more. If you generate more assets than the forward flow can handle, say $15M, you need a place to store the extra assets, which is where the warehouse comes in. This approach helps balance the certainty of immediate liquidity with the potential rewards of retained assets, making it easier to manage risk while optimizing financial outcomes.
Having a tool like Finley streamlines the complex processes involved in managing both forward flow and warehouse facilities. It ensures accurate and efficient data reporting, helps maintain compliance with lender requirements, and supports strategic decision-making by allowing you to easily route assets and manage cash flow.
Use Finley to manage your debt capital
Finley is private credit management software that helps companies with asset-backed loans save time and money by automating routine debt capital management tasks like borrowing base reporting, verification, and alerting.
Today, Finley manages over $2 billion in debt capital for customers like Ramp, Parafin, and Arc. If you're interested in learning more about software that can help you streamline your debt capital raise and management, just schedule a demo, watch our 60-second product walkthrough below, or take a self-guided product tour.
We'd love to chat!
