How Does Asset Based Lending Differ from Factoring?
If you are looking to use your company’s assets to finance your short-term working capital needs, it can be easy to get confused. There are forms of financing that are secured with company assets, and a lot of them, from factoring to MCAs to inventory loans. Then there’s asset-based lending, which is its own product with its own place in your financing portfolio. It’s important to know the difference between them, too, because ABL provides you with more reach, and it’s designed for more established businesses.
The key difference between factoring and other cash advance services versus ABL is the fact that ABL is a line of credit that works the way traditional lines of credit work, as a flexible tool you can draw on. Since asset-based financing is secured by your assets, the interest rates are often preferable to unsecured credit lines, too.
If you are looking for fast cash, factoring is the better choice. Asset-based lending can take several days to a week to move through the approval process, so it could be between five and ten days before you see any money. Factoring tends to operate within a 48 to 72-hour window. The advantage ABL has is that it establishes a credit line, so once it is up and working for your company, you can count on your credit line to be there when you need working capital.
While factoring is usually aimed at businesses that are newer and ABL is aimed at companies who are more established, both have their roles. A good ABL program will be able to work with you to track and update your assets, to keep your credit line up to date so you can always access an optimum draw when you need it. That requires a little more advance planning than financing your invoices would, but it also has the potential to support you in more ways. At the same time, if you need cash within two or three days, you need to consider factoring an option even for established businesses.
The real difference between established companies and startups that leads to established companies choosing options like asset-based lending more often is income. Once your financials qualify you for credit lines that allow you to access funds as you need them, you’re less likely to require the support of cash advance options, because you can always tap into your regular credit line when you need working capital. Once in a while you might still need to go further, but the bigger you get, the deeper your credit access gets.
