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 Cost Lower than Factoring
Please contact us if you have any questions about asset-based lending or factoring.
Factoring and asset-based lending are closely related. They both involve financing accounts receivable. While a factor actually buys your invoices, a lender lends against them. While factoring and A/B lending have both become more popular over the years, asset-based lending remains by far the more popular of the two. That’s because, if your business qualifies, the cost of A/B lending is significantly lower. Also, a lender will extend some amount of credit on inventory in addition to A/R. Most asset-based revolving lines of credit start at a minimum of $1million. However, your local bank may be willing to give you a smaller loan, secured by A/R and inventory.
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Do Banks offer Asset Based Lending?
Most banks do not engage in true asset-based lending. Instead, they make loan decisions based on credit scores and financial statements. Most banks use assets like accounts receivable as back-up security, not as the primary means to systematically pay a loan balance down.
In contrast, true asset-based lending involves using the payments coming in from your customers to automatically pay down the loan balance. Some banks are set-up to do asset-based lending or some modified version of it.
If you can qualify and get what you need, the best place to get money is from your local bank. No contest. Banks still have the cheapest money available---if you can get it. With the credit crisis and bad economy though, banks have really tightened up their lending standards. It is much more difficult to qualify for any kind of a loan now.
Until the banks start making more loans, factors and asset-based lenders stand ready to fill the void with alternative, asset-based financing.
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Quality and Quantity of Receivables
What matters to an asset-based lender is the quantity and quality of your receivables and inventory. That is the basis for credit decisions. If those assets are turning over well, an A/B lender may be willing to extend a credit line. That may be true even if your credit score is poor and your financial statements show signs of stress.
Asset-based lending is done on a revolving basis. You can typically get up to an 80% advance on your eligible receivables and up to 50% on finished inventory. Like factoring, as the amount of your eligible receivables increases, the amount of cash available to you also increases. Likewise, if the amount of receivables and inventory decreases, so does your available credit.
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