Asset-Based Lending vs. Factoring: Which Is Better for Your Business?

Businesses with significant accounts receivable often consider two financing options: asset-based lending and factoring.

Both can help turn receivables into working capital, but they work differently and may be appropriate for different types of businesses.

What Is Asset-Based Lending?

Asset-based lending, or ABL, typically provides a revolving credit facility secured by eligible business assets.

Collateral may include:

* Accounts receivable

* Inventory

* Equipment

* Other eligible assets

The lender generally establishes a borrowing base that determines how much credit is available.

What Is Factoring?

Factoring generally involves selling eligible accounts receivable to a factoring company.

Instead of waiting 30, 60, or 90 days for customers to pay, the business can receive a portion of the invoice value sooner.

What Is the Main Difference?

The fundamental difference is the financing structure.

With ABL, the business generally borrows against eligible assets.

With factoring, eligible receivables are generally sold to the factoring company.

Which Is Better for a Growing Business?

There is no single answer.

ABL may be attractive to established businesses with a meaningful base of accounts receivable, inventory, or other assets that need a revolving credit facility.

Factoring may be useful for companies that need liquidity against invoices but do not qualify for conventional bank financing or an ABL facility.

Which Option Provides More Financing?

The amount available depends on the company’s receivables, assets, customer quality, financial profile, and lender.

A larger company with substantial receivables and inventory may be able to obtain a significant ABL facility, while another company may find factoring better suited to its circumstances.

How Do I Choose?

Consider:

* Amount of financing required

* Accounts receivable

* Inventory

* Customer quality

* Customer concentration

* Financial performance

* Existing debt

* Growth rate

* Cost of financing

* Reporting requirements

Need Help Comparing ABL and Factoring?

Lirodean helps businesses evaluate asset-based lending, factoring, accounts receivable financing, and other working capital solutions.

Contact Lirodean to discuss which financing structure may be appropriate for your business.

Financing is subject to lender underwriting, collateral and receivable eligibility, approval, documentation, and applicable terms.