The Difference Between Asset-Based Lending and Factoring
Asset-based lending and factoring are popular alternative financing options for companies with less-than-ideal credit scores. If your business has trouble qualifying for other types of loans, there’s a good chance you can still get approved for asset-based loans or factoring.
What Is Asset-Based Lending?
The idea behind ABL is that you use a valuable asset as collateral for the loan, basically providing a guarantee of repayment or forfeiture of the item. Many different business assets can function as collateral, such as real estate, land, vehicles, equipment, machinery, and even valuable and readily salable inventory.
The advantages of ABL is that getting approved is virtually guaranteed as long as your assets are valuable enough to sustain the loan. Many lenders will extend you a certain percentage of the item’s value, which helps to reduce the risk they assume by providing your business with capital. The maximum amount of financing is generally the total amount of the asset’s value. For a vehicle worth $20,000, for example, the maximum loan amount is generally $20,000 or less. ABL is designed for short-term use, but interest rates can be favorable for small businesses.
If your company has many vehicles or other valuable items on hand, ABL can be a smart way to use your assets to boost business opportunities. With the liquid capital you obtain, you can upgrade computer systems, invest in marketing or expand certain areas of your operations. However, not all owners feel comfortable using assets in this way. You may not want to risk losing business properties if you default on the loan. In that case, factoring may be a better option for you.
What Is Factoring?
Invoice factoring is a kind of cash advance that involves exchanging unpaid invoices for an upfront payment from the lender. Invoices can be valuable assets too, and this option allows you to get the capital you need right away instead of waiting 30 to 60 days for your customers to pay. Factors usually provide a percentage of capital immediately, and the rest of the invoice amount minus a small processing percentage once payment is made.
Factoring doesn’t require any collateral, so you don’t have to worry about accruing any debt. However, some owners dislike having a third party contact their customers to collect payment.
Asset-based lending and factoring are both valid options for business owners looking for a source of short-term capital. This capital can be used as emergency funding to pay off urgent debts or taxes, or it can be an effective way to contribute to business growth, such as by purchasing additional inventory in preparation for a period of high demand.