Comparing Asset-Based Lending to Factoring
It is often the case that asset-based lending and factoring get used interchangeably. The reality is there are substantial differences between these two different types of financing.
What Each Lending Vehicle Shares in Common
Both types of financing are great for companies that do not have long track records or established revenue streams. They can even be great for companies that don’t operate in stable markets with regular revenue streams.
Both financing options use accounts receivable as the primary collateral source. These financing methods provide companies with working capital during crutches in their cash flow when business may be slow or for companies that operate in a seasonal business model.
Understanding Asset-Based Lending
In asset-based lending, companies can receive a term loan or a revolving line of credit that businesses can access when they need funds. Credit limits in this type of financing have their bases in the company’s assets. Some of the assets in question can include accounts receivable, equipment, machinery, as well as inventory on hand.
In this type of financing, companies do not sell their assets but rather simply borrow against them. The benefit of this type of financing is the basis of the loan is in the liquidity value of the assets. What that means for companies is that even during hard times, the collateral’s value remains stable, thus guaranteeing the availability of loans.
Simply put, factoring is a cash advance on money owed to you by clients and customers. An important distinction with factoring is that this is not a loan, and as such, there are no monthly payments for this type of financing.
When companies enter into factoring agreements with lenders, they save themselves the time and hassle of the collections process. This benefit of factoring can often be a substantial incentive to companies pursuing this type of financing since they most likely have little expertise in pursuing outstanding amounts owed.
It is quite often the case that in this type of financing arrangement, when a company issues an invoice, the factoring lender will immediately pay up to 90% of the value of the invoice. It then becomes the factoring lender’s responsibility to collect the invoice’s total amount.
What both of these financing options share in common is that they allow companies quick access to cash when needed by the company. Both of these options can help to eliminate the stress business owners often feel when in a cash crunch so they can focus on the core elements of their business.