Factoring vs. Asset Based Lending
12.08.20xx | Blog
In a post-recession economy, where “cash is king”, many businesses were adversely affected through an overall decrease in sales and increased cost cutting measures. Businesses felt the “cash crunch” as cash flows through ongoing functions were not adequate to fund the growth and advancement of its operations. Many businesses sought to find alternative means of working capital for a temporary capital infusion, or to fund both short and long- term growth.
Many businesses turned to asset based lending or factoring to fulfill their financing requirements. Although, both are creative working capital solutions in the financing arena, the distinction can be blurred at times, thus we need to differentiate the apples from oranges.
Asset Based Lending (ABL) provides businesses with immediate funds and ongoing cash flows in the form of a revolving line of credit advanced at a percentage of the value of the Company’s assets. Most prevalent assets utilized as collateral are accounts receivable, and inventory. Other assets that can be used as collateral include cash, machinery/equipment and real estate. ABL is flexible in that the limit of financing available is directly proportionate to the collateral available, and is more focused on liquidity and less on maintaining financial ratios.
Factoring is a simple and debt-free way to access the cash tied up in the receivables by allowing businesses to sell the asset to a lender. Factoring is not a loan, so there is no monthly payment or obligation. Factoring is a sales transaction that involves three parties: the debtor (customer), the Company and the Factor. The Factor will usually give the Company a certain percentage of the face value of the receivable