The Difference Between Asset Based Lending and Factoring
If you are borrowing money to help run your business, you may be considering asset based financing and invoice factoring as two possible options. They both offer funding that is secured against an asset that you own. However, they are different in a lot of ways. So, it is important to understand each one to determine which is right for you.
Asset Based Financing
This type of financing uses your assets as collateral for your loan. This can be both fixed assets such as real estate and equipment or liquid assets such as inventory. Like any other loan, you receive a sum upfront and then pay it back with interest and fees. Due to the collateral, you can often borrow more with lower rates using asset-based lending compared to credit-based lending.
These loans can be almost any length (sometimes going up to 25 or 30 years for major purchases). They also are true loans, unlike invoice factoring.
At first glance, factoring may appear to be a form of asset based lending. However, it is a little different.
When you factor invoices, you are selling them at a slight discount on the nominal value. Therefore, your business receives most of the money upfront and can invest it in any business need. There are no restrictions on this money and there is nothing to repay. The factoring company then collects the money from your customer.
There are many different arrangements for factoring. Some providers will pay a certain amount then split the remainder. For example, you may receive 85% upfront then another 7.5% after the balance is paid. Additionally, different providers have their own rules for recourse (whether you have to pay back the sale price if your customer doesn’t pay).
How To Choose
The decision between these two options depends a lot on what you need. Asset based lending has the advantage of flexible terms and amounts. If you want to buy a major capital asset, factoring is not likely to provide enough money.
However, factoring has the benefit of being easy to qualify for. It also tends to be very fast-moving. This can be great if you have difficulty with cash flow due to slow-paying customers.
Both forms of financing can be very helpful when used properly. Learn more about them and see if asset based financing or factoring (or both) could help your business grow and reach your goals.