If you are a business owner and you have failed to meet the qualifications for a regular bank loan, you should consider factoring or asset-based loans as a source of financing. Before you apply for either, here are a few differences between the two.
In case you are operating under a tight schedule and need finances urgently, then you should choose factoring over asset-based lending. The approval process in factoring involves verification of your invoices, after which the money is issued in a few days’ time. Meanwhile, in asset-based loans, the valuation of the assets you choose as collateral must take place, which often takes several days.
Asset-based lending offers better financial privacy to business owners than factoring. In factoring, the factor must inform your client to verify their accounts. Your clients, therefore, find out you are operating through factoring. On the other hand, asset-based financing involves little to no interaction between your creditor and the customer. How you finance your business, therefore, remains a secret that you decide on who to tell.
Though both have a considerable amount of risk, asset-based loaning is less risky for growing businesses or start-ups. This because it is secured against your assets rather than on clients you may not reliably have.
Collateral and Credit
Factoring is more suited for a business that has a bad credit history. Its application is not dependent on your credit score but instead relies on the monetary value of your invoices. It also does not require any collateral other than your invoice; hence you avoid putting up your assets as security. Asset-based loans depend more on the value of your assets rather than your credit score. The amount of financing is determined by the equity of the value of the asset secured against it. If you lack valuable assets, then you should opt for factoring.
In both forms of financing, you are obligated to cover interests charged and associated fees in addition to the amount you have been lent. Interest in factoring is usually charged after 30 days, which may make it more expensive than asset-based loans that have annual based interest rates. Other criteria, like the applicant’s creditworthiness and asset value, may make it a more expensive option than factoring.
By understanding the differences in approval time, privacy concerns, risk, collateral, credit, and expenses between factoring and asset-based loaning, you will be able to make an informed decision on the financing option that suits your business better.