What is asset based lending?<\/h4>\n
An\u00a0Asset Based Loan\u00a0(ABL) is a loan or line of credit that is secured using company assets as collateral. The collateral used for security often includes accounts receivable, inventory, equipment, and other assets. Most asset based loans are structured as lines of credit. They allow the company to draw funds to pay corporate expenses or make new investments.<\/p>\n
The lender uses the value of the assets to determine a\u00a0borrowing base<\/em>\u00a0\u2013 essentially the amount of money you can borrow. The borrowing base is usually a percentage of the market value of these assets. ABL lenders often provide a loan-to-value (LTV) ratio of 75% to 90% for accounts receivable. Other collateral, such as\u00a0inventory\u00a0or equipment, is financed at a lower LTV, usually 50% or less.<\/p>\n The borrowing base is updated regularly to reflect changes in asset value. For example, new invoices that are created and old invoices that are paid can change the available borrowing base.<\/p>\n Asset based loans have a\u00a0number of advantages\u00a0and are provided to small businesses that are well established and have tangible assets.\u00a0Learn more by reading \u201cWhat is an asset based loan?\u201d<\/p>\n Invoice factoring is a type of business financing in which a factoring company\u00a0purchases\u00a0<\/em>accounts receivable in exchange for an immediate payment. This payment provides liquidity to the client. Factoring helps companies that have cash flow problems because they cannot wait the usual 30 to 90 days for customers to pay invoices.<\/p>\n While factoring transactions can resemble the function of a line of credit, they are often structured as an actual sale. The finance company purchases each\u00a0invoice through a purchase and sale agreement. As part of the purchasing process, the finance company\u00a0notifies the payer\u00a0of the purchase and\u00a0verifies the accuracy\u00a0of\u00a0the invoice. Learn more\u00a0about invoice factoring.<\/p>\n On the surface, asset based loans and factoring programs can look and behave similarly because both programs can provide similar benefits.\u00a0However, these products have important differences.<\/p>\n Risk level<\/strong><\/p>\n Factoring is provided to new and growing companies that\u00a0can\u2019t qualify for conventional bank financing<\/em>. Therefore, factoring is considered a riskier form of financing from the lender\u2019s perspective.<\/p>\n Asset based loans, on the other hand, are provided to larger and more established companies. While these companies still many not qualify for bank financing, they are well on their way to being \u201cbankable.\u201d<\/p>\n Size<\/strong><\/p>\n Most asset based loans start with a borrowing base of \u00a3600,000 and can reach as high as a few million dollars. Factoring lines, on the other hand, have no minimums and can work with\u00a0small businesses\u00a0and startups.<\/p>\n Cost<\/strong><\/p>\n Cost is one important difference between these products. Generally, asset based loans are substantially cheaper than invoice factoring lines. Factoring lines are priced by discounting the full value of the invoice by a percentage. Discounts range from 1.5% to 3.5% per 30 days.<\/p>\n Asset based loans, on the other hand, are priced \u00a0with an annual percentage rate (APR). The APR on an ABL can range from 7% to 15%. However, many variables, such as risk and line size,\u00a0can impact the final costs.<\/p>\n Customer contact and interactions<\/strong><\/p>\n Factoring lines require a high level of interaction between the factoring company and the customer paying the invoice. As mentioned before, customers are notified and invoices are verified regularly to ensure that the invoices being purchased are accurate. Consequently, your customers will know that you are using accounts receivable factoring. This aspect of factoring is not necessarily a problem, but it is something you should be aware of.<\/p>\n Asset based lenders don\u2019t have any substantial contact with your customers. They may\u00a0verify some invoices, but, usually, your customers will not know you are using the facility.<\/p>\n Due diligence<\/strong><\/p>\n Most factoring facilities require minimal due diligence. Often, the factoring company reviews the client\u2019s financials and performs a collateral search. With few exceptions, this review can be done in a day or two and is inexpensive.<\/p>\n Asset based loans, due to their larger size and structure, require substantially more due diligence. Lenders usually perform collateral checks and audits to review the accounting ledgers. Most ABL providers charge a few thousand dollars for this process, though costs vary.<\/p>\n One important similarity between these products is how customer payments are handled. Since accounts receivable are the main collateral backing both transactions types, customers\u00a0mail payments to a lockbox\u00a0controlled by the lender. Customer payments are used to settle the transactions.<\/p>\n Note that payments sent to lockboxes\u00a0can be made in the client\u2019s name<\/em>. Therefore, the payment is mailed in your name to the lockbox address, and the check can be made to your name as well.<\/p>\n Consequently, using a lockbox does not necessarily alert your customers that you are using an ABL or a factoring line.<\/p>\n Most companies prefer to use asset based loans over factoring due to flexibility. However, asset based loans tend to have high due diligence costs and are available only\u00a0to companies that meet their\u00a0size and collateral requirements.<\/p>\n Alternatively, factoring is available to companies of all sizes, has minimal due diligence costs, and is relatively easy to get.<\/p>\n<\/div>","protected":false},"excerpt":{"rendered":" Factoring is a type of asset based financing that is often confused with asset based lending. While these products have some similarities, they are very different.\u00a0This article helps you understand the differences between these products and helps you determine which one is best suited for your company. What is asset based lending? An\u00a0Asset Based Loan\u00a0(ABL) […]<\/p>\n","protected":false},"author":3,"featured_media":6889,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[24,12],"tags":[],"class_list":["post-7051","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-finance-en","category-uncategorized-fr"],"_links":{"self":[{"href":"https:\/\/dagroup.pxdev.xyz\/en\/wp-json\/wp\/v2\/posts\/7051","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/dagroup.pxdev.xyz\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/dagroup.pxdev.xyz\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/dagroup.pxdev.xyz\/en\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/dagroup.pxdev.xyz\/en\/wp-json\/wp\/v2\/comments?post=7051"}],"version-history":[{"count":0,"href":"https:\/\/dagroup.pxdev.xyz\/en\/wp-json\/wp\/v2\/posts\/7051\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/dagroup.pxdev.xyz\/en\/wp-json\/wp\/v2\/media\/6889"}],"wp:attachment":[{"href":"https:\/\/dagroup.pxdev.xyz\/en\/wp-json\/wp\/v2\/media?parent=7051"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/dagroup.pxdev.xyz\/en\/wp-json\/wp\/v2\/categories?post=7051"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/dagroup.pxdev.xyz\/en\/wp-json\/wp\/v2\/tags?post=7051"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}What is factoring?<\/h4>\n
Differences between factoring and asset based loans<\/h4>\n
Similarities between factoring and asset based lending<\/h4>\n
Which product is best for your company?<\/h4>\n