As a business owner, you need to be aware of all the alternatives at your disposal to help grow your business or manage cash flow. Two popular options are receivables factoring and asset-based lending. And while these two types of financing may seem similar, there are some key differences to consider. Keep reading to learn more.
Simply put, receivables factoring consists in selling your unpaid invoices to a third-party company called Factor.
The Factor pays you upfront so you don’t have to wait 30 to 90 days to get paid, and then collects the invoices from your customers in exchange for a small fee. Some of the main benefits of receivables factoring include:
- Improved cash flow. By selling your outstanding invoices, you can access cash quickly without having to wait for customers to pay.
- No debt. Unlike loans, factoring is not considered debt, which can be helpful if you are already carrying a heavy debt load or just want to stay debt-free.
- Easy to get. Factoring is not based on your creditworthiness but on that of your customers, which saves you the trouble of having to meet complicated requirements.
Asset-based lending (or ABL for short) involves using your business assets, such as accounts receivables, inventory, or equipment, as collateral to secure a loan.
Here, the lender determines the value of your assets and offers a loan amount based on a percentage of that value.
With asset-based lending, as with other types of financing, Interest rates and fees vary depending on the lender and the specific terms of the loan.
Receivables Factoring vs Asset-Based Lending
Here are the key points you need to keep in mind when choosing between receivables factoring and asset-based loans.
- Cash flow vs large purchases/investments. Receivables factoring is better suited for companies looking to improve their cash flow. Asset-based lending, on the other hand, may be the right alternative if you are looking to make large purchases or investments ($700,000 or more).
- Unlike factoring, asset-based lending creates debt. And while this isn’t necessarily a bad thing, you need to keep it in mind when weighing your options.
- You put your collateral at risk. Asset-based lending involves the possibility of losing the assets you use as collateral. With factoring, this risk doesn’t exist because you are simply selling something that belongs to you (your unpaid receivables).
- Your credit can suffer with asset-based lending. Should you default on your asset-based loan, your credit is sure to take a hit that can prevent you from accessing capital in the future. Also from this point of view, Receivables Factoring is a much safer alternative.
ACS Factors: We Turn Your Invoices Into Cash
We are a Factoring company located in Upland, California, with many clients nationwide in the distribution and logistics corridor which includes Ontario, Riverside, Fontana, Jurupa Valley, and Moreno Valley.