When you’re looking for access to working capital, there are many types of financing you can apply for. Two of the most popular are asset-based lending and factoring.
These two financing options are very different, and don’t work for every company. However, they both offer benefits that can help a business grow depending on its needs.
What Is Asset-Based Lending?
The definition of asset-based lending can be found in the name: It’s a loan secured by an asset put up for collateral. This can include mortgages, where a property acts as collateral, or equipment loans, where a piece of machinery fulfills the role. The asset’s value determines the amount of the loan.
In addition to paying back the amount borrowed, businesses are also responsible for paying interest. This is calculated based on the principal remaining and the APR.
What Are the Benefits of Asset-Based Lending?
Asset based financing is often used to purchase items that are too expensive to buy in a lump sum. Using a loan allows companies to instead make monthly payments while still having use of the asset. Securing the loan with collateral can also mean a lower interest rate compared to unsecured financing.
What Is Factoring?
Factoring is very different from asset-based lending in that it is not a loan. Instead, it’s a way for businesses to create a stable source of income if they rely on accounts receivable. Rather than collecting on debts themselves, companies can sell their invoices for a percentage of their worth. The buyer then collects the full amount from customers to make a profit.
What Are the Benefits of Factoring?
The biggest benefit of factoring is immediate payment of an invoice. Instead of waiting months for payment, companies can get cash within a day of selling their accounts receivable. Additionally, since factoring doesn’t involve borrowing funds, there’s no interest to worry about. In fact, companies that may not qualify for asset-based loans may still be approved for factoring.
Which Is Right for You?
To figure out which financing works for you, you must look at your company’s needs. Do you need to purchase an item, but don’t have the funds for a lump payment? Then asset-based financing is the best option. Does your business model require you to take payments after delivering goods and services, resulting in a delay of 30 to 90 days before you receive the money? Then factoring is the better choice.