Factoring and asset-based lending are two of the most popular ways to finance businesses. These financing options can benefit different types of companies. To determine which to go for, it is a good idea to compare how they stack up regarding privacy, approval time, and other criteria.

Privacy

For businesses valuing privacy, asset-based loans are a better fit than factoring. This is because the factoring company will need to contact your customers to verify the accounts you are using as collateral. This, in turn, lets your customers know that you are using factoring to finance your operations. On the other hand, ABL will only contact your customers if you are using your Accounts Receivable as collateral for the loan.

Approval Time

Factoring is generally faster than asset-based loans because the factor will only need a few days to verify the invoices you are using. ABL requires the value of your collateral to be determined, usually by the lender sending someone to audit the assets. This can take days or even weeks to verify.

Risks

Factoring and asset-based lending will have associated risks to company owners and underwriters. Factoring is generally considered riskier because if your customers do not pay on their accounts, you are still responsible for that portion of the repayment. ABL are secured with assets and considered less risky. If you default on the loan, your assets will be forfeited and sold by the lender to recoup some of the balance.

Collateral

Both factoring and ABL lenders will work with companies with poor or no credit because both are secured with collateral. Factoring technically has no collateral attached, but the funding is secured with your invoices and the contract. With asset-based loans, the value of your collateral is more important than your credit score. You can use accounts receivable, raw materials, equipment, inventory, patents, and fixed assets as collateral. Many business owners will choose to factor because they do not want to risk losing the collateral if they cannot repay the loan.

Costs

These financing options have associated fees that can be different from comparable bank loans. With factoring, standard costs are included in the principal from the beginning, and interest is charged every thirty days and can be higher than ABL interest. With asset-based loans, you will be looking at an annual percentage rate of between seven and fifteen percent compounded monthly or annually.

Asset-based lending and factoring are only two of many different types of business financing available to you. Knowing how they compare on criteria such as costs, risks, and privacy will help you choose the right one for your company.