Nearly every small business needs to apply for financing at some point. It is not always easy to qualify for a bank loan, especially when you’re just starting or going through a rough patch. Many business owners turn to factoring or asset-based lending. What are these loan products, and which is best for you?
Factoring allows a business to get cash quickly. A lender estimates the business’s future income based on the amount due on a business invoice or accounts receivable. Asset-based loans are approved based on the value of your business assets. Your equipment, raw materials, and inventory serve as collateral for the loan.
Risk is a factor in any borrowing. Asset-based loans are viewed as a safer option for lenders because tangible items secure the loan. Since a company needs sufficient equity in its assets to use them as collateral, asset-based loans are more often available to established businesses with significant growth. Factoring tends to be offered to new and expanding businesses.
A lender must confirm the worth of your valuables for an asset-based loan. It can take many days to perform an audit, so you may have to wait a while for approval. Approval for factoring is usually much quicker. A lender simply needs to verify your invoice accounts. Once verification is complete, they can offer you the capital you requested. This process can be completed in a few days.
Fees and interest are the cost of any lending product. Asset-based loans charge an annual percentage rate. The percentage is determined by your credit rating, your assets’ value, and current market rates. A factor charges interest every 30 days, so factoring tends to be more costly. For this reason, many business owners prefer factoring as a short-term borrowing solution.
Asset-based loans give a business owner more privacy than factoring. There is usually no need for the lender to interact with your customer since the lender only needs to check your assets as collateral. The exception to this is if you decide to use accounts receivable to secure your loan. With factoring, your clients will know that you are financing because the factor has to contact your clients for account verification.
There are pros and cons to both asset-based lending and factoring. Factoring is quicker and easier to get, but asset-based lending can be less expensive, less risky, and more private. Review the facts, and figure out which works for your company.
