Businesses often require additional funding to stabilize cash flow, pay expenses, and spur further growth. However, some growing companies are unable to qualify for traditional bank loans. Two alternative sources of financing to consider are factoring and asset-based loans. Here are some of the main differences between these funding methods.
Speed of Approval
If you need funds speedily, you may want to consider factoring instead of asset-based loans. The factoring approval process consists merely in the verification of the accounts receivables involved. When this is done, you can often receive the money you need within a couple of days. With asset-based lending, though, the process takes longer because lenders must first affirm the value of the assets you want to use for collateral.
Because factors generally charge interest every 30 days, factoring is more expensive than asset-based lending. In contrast, interest on an asset-based loan is charged annually. Asset-based lending is usually considered a more secure form of financing than factoring, although both involve a modicum of risk.
Factoring is an ideal method of financing for businesses without high credit scores or a significant amount of assets. The accounts receivables you factor are the only collateral required. Your business does not need a high credit score with asset-based lending either as long as the assets you use as collateral are of sufficient value. These assets may include inventory, equipment, materials, patents, or accounts receivables.
Businesses concerned with maintaining their privacy may prefer asset-based lending over factoring. When you factor your invoices, the factor generally contacts your customers directly to verify their accounts receivables. However, with asset-based lending, lenders do not need to communicate with your customers. This maintains the privacy of your business funding methods. The only exception to this would be if you use your accounts receivables as collateral for your asset-based loan.
For more information on factoring and asset-based lending, get in touch with Park Cedar Commercial Lending.