Factoring vs. Asset Based Lending

SHARE
'.__('Factoring vs. Asset Based Lending', 'Kappe').'

Factoring and asset-based lending are both commonly confused with one another. 

This is because factoring is a type of financing based on assets.   

Starting a business is hard and finding the right financing options is an ongoing issue that you will be faced with multiple times. 

Here are some of the things that startups must consider.

factoring-vs-asset-based-lending1

 

Understanding the difference between factoring and asset based lending is important. 

Here we will show you the differences and similarities that exist between them. 

By using this information, you can better decide which one is right for your business.

Asset Based Loans

If you are looking at an asset based lending, then you are looking at a type of credit or loan option that takes and holds the property of the company for collateral. 

Numerous types of insurance that are obtained for security reasons commonly include:

  • Inventory that the business has
  • Receivable accounts
  • Equipment that the business owns
  • Any other asset that the company may hold

These types of loans are usually set up like a line of credit. 

This means that the firm can take out funds to pay their expenses or so that they can afford any new investment they want to make but cannot afford on their own.

The total amount the assets are worth is used by the lender for them to be able to decide the borrowing base. 

The borrowing base is basically how much money the company is allowed to borrow. 

This number is normally a fraction of the total market value that is held by the assets. 

The loan-to-value ratio provided by most asset-based loan lenders is between 75-90% for accounts receivable. 

Equipment, inventory, and other types of collateral are normally financed with a lower loan-to-value rate. 

This number is typically no more than fifty percent. 

Any changes in the value of assets are reflected in the borrowing base because it is regularly updated to count for the fact that the value of assets changes. 

An example would be taking into consideration invoices that have been paid and new ones that have been made.

Factoring

When a factoring company buys accounts for the option of payment being received immediately, this is known as invoice factoring. 

This method can also help businesses avoid problems with cash flow. 

Normally, a business is not going to be able to wait financially the thirty to the ninety-day period it takes for their consumers to pay their invoices.    

Factoring is very similar to the function played by credit. 

However, more times than not they are set up for a sale rather than credit. 

The first thing that is done is that a finance company buys the invoices.

The finance company will let the payer know the purchase has taken place a verify whether or not the invoice is accurate as part of this agreement.

Invoice factoring is only available to business that sells to other firms.

Differences

Factoring and asset based lending both have similarities. 

At first glance, they can appear to be the same thing. 

This is because each of them come with benefits that are similar to one another. 

There are some differences in each one, however. 

These differences include:

  • The amount of risk
  • The amount that can be borrowed
  • The cost of each one
  • The amount of interaction with customers
  • The amount of due diligence required

The Amount of Risk

Factoring is an option for companies that are new to the scene and are typically still growing and want to seek out if they are unable to qualify for financing through a bank. 

This means that factoring is commonly considered as taking a higher risk, according to the lender.

Asset-based lending is given to companies that are larger and better established. 

It is true that these enterprises could or could fail to qualify for a bank loan. 

However, either way, you spin it, they either qualify or will shortly.

The Amount that can be borrowed

Asset based lending begin with a $7000,000 borrowing base. 

There are no minimums with factoring, however, making them well suited for the smaller and less established businesses.

The Cost of Each

One of the biggest differences between factoring and asset based loans are the cost of each one. 

Asset-based lending is typically a significant amount less than the option of factoring. 

The price for factoring is figured out by placing a discount on the overall value of an invoice.

A certain percentage is used to lower the cost of the bill. 

This cut falls between 1.5 percent and 3.5 percent for a thirty-day period. 

However, there are many things that can factor into the final amount.

Interaction with Customers

A factoring company must maintain constant interaction with the client that is making the payment. 

Customers are told of the purchase by the factoring company. 

The factoring company also checks the invoices on a regular basis to ensure the invoices that they are buying are accurate.

This means that your customers are informed of the fact your company is utilizing services. 

This isn’t necessarily an issue. 

However, you need to know that your clients know you are using factoring services.

On the other hand, the other lenders have very little contact with consumers. 

They may have to verify the accuracy of an invoice here or there. 

But, your customers typically have no knowledge that you’re utilizing the services.

Factoring services work like this:

factoring-vs-asset-based-lending2

Due Diligence

Most factoring agencies require a minuscule amount of due diligence. 

More times than not, the company will review the client’s financials. 

It’s already been established that asset-based loans are larger in both size and structure. 

Because of these factors, these loans require much more due diligence than factoring does. 

These lenders review accounting ledgers by conducting collateral checks and carrying out audits.

Most asset-based lending costs a few thousand dollars. 

However, costs are known to vary.

Similarities

There are some similarities between the two. 

One of the biggest similarities is the handling of customer payments. 

Both types of transactions use accounts receivable as the primary type of collateral being used.   

Because of this, customers mail their payments to the address of a lock box that the lender controls.  

These amounts are utilized for the purpose of settling the transactions.

It is important to remember that the payments that are sent to these lockboxes can be in the name of the client. 

Because of this, when a customer emails a payment to the address for the lockbox, it is done in your name. 

The check also has the ability also be your name. 

The lockbox is not going always to tell your consumers when factoring or asset-based loan services are being used.

The following is similar to how asset based loans work.

factoring-vs-asset-based-lending3

Which One?

Asset based lending is preferred by many over factoring.

This is because of the flexibility provided by these loans. 

However, these loans also come with high costs, and are only given to the companies that meet the requirements for size and assets of the enterprise.

Factoring, on the other hand, can be utilized by a company of any size. 

These come with minimal due diligence costs and are pretty easy to qualify.

The one that you choose is solely dependent on the structure and circumstances of your company.