Factoring or Asset-Based Lending – Which is Best for Your Small Business?

Factoring and asset-based lending have similarities, but they are distinctly different ways to improve cash flow for your small business.

Factoring

Factoring, also known as invoice factoring and Accounts Receivable factoring, is a situation in which a factoring company buys your accounts receivable in exchange for an immediate payment.  Factoring can be a very effective way for businesses to improve their cash flow by eliminating the 30 to 90-day waiting period to get paid.

The factoring company notifies the payer of the purchase and verifies the accuracy of the invoice(s) and handles the collection process on behalf of your business.

Factoring provides immediate cash and does not require a lengthy application or approval process.  There is no application fee and most applicants are approved in as little as 24 hours.  Factoring does not require a long-term contract and there are no restrictions on how funds are used.

Asset Based Lending

Frequently referred to as an ABL, this type of loan or line of credit that is secured using the company’s assets as collateral.  The collateral can include your accounts receivable, business equipment, inventory or other physical assets.  In most cases, the asset-based lending agreement is structured as a line of credit and allows you to draw funds for a variety of uses, including paying for daily operating expenses and making new investments.

The amount of money you can borrow through an asset-based lending agreement is dependent on the value of the assets that are used as collateral.  Lending rates are based on a loan-to-value (LTV) ratio which typically ranges from 75% to 90% for accounts receivable and is usually 50% or less for other types of collateral including inventory and equipment.

If accounts receivable are used as collateral, the borrowing base is updated regularly.  In other words, newly created invoices and those that are paid off can affect how much you are able to borrow.

Although the approval process is faster and less invasive than for traditional loans and lines of credit, it can take up to two weeks or more.

Asset-based loans also require substantially more due diligence than factoring and asset-based lenders usually perform collateral checks and audits to review the accounting ledgers. Most asset-based lenders charge a few thousand dollars for this process, though your actual cost may vary.

I hope this information is helpful.  To learn more about the differences between factoring and asset-based lending, give us a call at 1-800-297-6652 or 972-404-4726 in the Dallas/Fort Worth metroplex.

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