Asset-Based Lending and Invoice Factoring: What’s the Difference?
Asset-based lending and invoice factoring are alternative financing options that benefit many businesses. However, some business owners can confuse the two options due to their similarity, as they both provide immediate cash flow and the company’s accounts receivable is involved in the funding process.
Here, we’ll explain how asset-based lending and invoice factoring work and their respective benefits.
What is Asset-based lending?
Asset-based lending can be structured as a loan or line of credit, both of which are collateralized with a company’s assets. This type of financing is often used by small or medium-sized businesses that have difficulty meeting the requirements for traditional financing. While it is common for the chosen collateral to be accounts receivable, other assets such as inventory or equipment are also eligible.
Benefits of asset-based lending
Companies that opt for asset-based lending benefit from the flexibility provided by most asset-based lending facilities, including Accel Business Funding. As your sales increase, the amount you can borrow increases as well. In addition, the underwriting process is much quicker than for traditional financing since companies would only need to fill out a one-page application and provide few financial documents. Finally, asset-based lending will provide your business with reliable cash flow and help your business achieve financial stability. The money to pay your employees or buy supplies will be readily available to you, allowing you to focus on other aspects of your business operations.
What is Invoice factoring?
Invoice factoring is where a factoring company (the factor), chooses to buy your outstanding invoices. In exchange for the outstanding invoices, the factor’s client is given immediate advance payment. While the factor assists you in invoice collection, the client is given working capital without having to wait months for the invoice payment.
Whereas asset-based lending involves clients pledging their accounts receivable as collateral, meaning that the clients still own their invoices, invoice factoring involves a factor buying a company’s unpaid invoices from them.
Benefits of invoice factoring
Companies who choose to factor benefit from the quick cash turnaround, which helps to stabilize their cash flow. Many companies are unable to wait months for customers to pay their invoices, and invoice factoring closes the funding gap for companies. This is not only appealing to smaller or newer companies that may not have the means to wait on their customers’ payments, but also to larger corporations that may need short-term supplementation to their cash flow. In contrast to traditional financing, which focuses on the client’s credit history, factoring companies instead focus more on the customer’s credit history. Even if you may not have a stellar credit history, if your customers are reliable in making invoice payments, then you are eligible for invoice factoring. Thus, the approval process is incredibly quick and you can receive upfront advance payment within days. Another benefit would include not needing to follow up on customers for invoice payments.
Accel Business Funding has helped many businesses through our asset-based lending and invoice factoring services.