The Difference Between Asset Based Lending and Factoring
If your company is looking to obtain some quick cash, perhaps you have considered asset based financing. When small business find themselves needing capital to support their operations, they can turn to several options to meet their immediate needs. As with any financing practice, use these options with caution, relying on the benefits for short-term assistance.
When companies choose factoring, they are relying on a lender to purchase outstanding invoices and advance them a percentage of the owed amount. When clients do not remit payment in a timely manner, it can stifle cash flow and halt your ability to efficiently meet business obligations. A factoring company will offer your company a cash payout between 70% to 90% of the invoice amount for a fee, then assume the process of collecting the debt from your client. You are able to have cash in hand without waiting the 30-90 days it sometimes takes for customers to pay.
Asset Based Financing
As an alternative to factoring, some businesses can utilize the value of their assets for access to cash. With this type of lending, fixed and liquid assets are used to secure a cash payout from a loan. Fixed assets are those which retain their value over time, and usually include categories of equipment, heavy machinery and even property. A liquid asset has a value that can change, such as unpaid customer invoices or a companies inventory.
The Difference Between Them
While both financing options hold the promise of access to working capital, there are some differences which can help you decide which option is right for your company. With factoring, you eliminate a lot of paperwork and energy associated with collections and chasing down customer payments. Approval is easy, as it looks at your customer’s credit and payment history. The fee structure is often straightforward, and there is little jeopardy of losing important assets.
With asset based financing, while you do have access to cash, you must face the realities associated with failure to pay the debt. While you may have access to a larger lump sum of cash, you potentially face higher interest rates, inflexible payment plans and the potential to lose your equipment or machinery should you neglect your payment obligations.
By educating yourself on the differences between small business financing, you can make an informed decision as to the options that work best for your business and cash flow needs.