As the owner of a small or medium-sized business, you are sometimes faced with the question of raising the funds necessary to grow your business further.
Asset-based financing and factoring are two important methods companies use to leverage their receivables portfolios in corporate financing.
Both financial instruments provide much-needed working capital and enable the companies to drive growth, manage cash flow, and meet their immediate financial obligations.
Below we will explain the key differences between these two financing options to help you choose the right solution for your needs.
Let’s begin!
Asset-based financing is a type of financing that uses assets such as inventory and equipment as collateral for a loan.
It is a relatively new form of business financing originating in the U.S. and is most common in the UK and some other EU countries.
Companies typically use it to finance business operations, purchase equipment, or expand their business.
Businesses can obtain funds at competitive interest rates and flexible repayment terms through asset-based lending.
The amount of asset-based financing depends on the type and value of the assets provided as collateral.
It's important to keep in mind that selling your assets is not a requirement for asset-based financing. Instead, all you are doing is borrowing against them.
Furthermore, in the event that the business fails to fulfill its commitments, the lender is entitled to repossess the asset since it is being used as collateral.
The amount of asset-based financing depends on the type and value of the assets provided as collateral.
Some lenders prefer physical assets that can be easily converted into cash if the borrower defaults.
A typical asset-based financing agreement goes as follows:
📌Either:
The company meets the repayment terms on time, and the contract ends with no long-term obligations.
📌Or:
The company defaults on payments, and the assets pledged in the agreement are collected by the lender.
Asset-based financing is particularly well-suited for:
Factoring is a form of financing in which a company sells its accounts receivable (unpaid invoices) at a discounted interest rate to a third-party company called a factoring company.
This provides the company with immediate cash flow while the factoring company assumes responsibility for collecting payment from customers for the invoices.
Here's how factoring works:
1. Invoice Sale: An invoice factoring company purchases your unpaid bills from you at a small discount. To assess risk, the factoring provider looks at the creditworthiness of your billed clients.
2. Collection: The factoring company has responsibility for collecting payments from your clients, such as providing invoices and following up on payments.
3. Available Cash Advance: Following approval, you receive a sizable advance from the factoring company, usually between 70% and 100% of the invoice's value.
The details of your factoring arrangement and the nature of your firm will determine the precise advance percentage.
4. Balanced Settlement: The factoring company pays your business the leftover balance after deducting a factoring fee from your clients' invoices.
📌 The main advantage of invoice factoring is that you may get your bills funded in as little as 24 to 48 hours, as opposed to waiting 30 to 120 days or even more.
A typical factoring agreement goes as follows:
Invoice factoring can be an ideal financing solution for different types of businesses, such as:
Asset-based financing and factoring each have their own pros and cons.
The following are the pros and cons of asset-based financing:
✅ Asset-based loans are easier and faster to get than credit lines and unsecured loans.
✅ Loan applications from businesses of all sizes are welcome.
✅ It gives you the opportunity to grow by leveraging the value of unused assets to increase cash flow.
🚫 Your lender may seize the collateral it received from you and sell it to recoup its losses if you are unable to repay the loan.
🚫 Every asset-based lender has different standards for loan eligibility. Therefore, not every asset can be used as collateral.
🚫 The asset's worth will consistently be quoted by the lender as being lower than its current market value. It indicates that you'll be able to get a smaller loan in comparison to what you expected.
And here are the pros and cons of factoring:
✅ Offers quick access to funds in a matter of business days, in contrast to the protracted loan approval process associated with conventional loans.
✅ Because it depends on the client's creditworthiness, it is appropriate for companies with bad credit.
✅ Assigning the factoring company the task of collecting payments provides a steady cash flow.
🚫 Businesses pass on interest and fees to the factoring provider, which lowers their total earnings.
🚫 Undisclosed costs from certain factoring companies might further reduce profit margins.
🚫 The clients' creditworthiness determines whether they are eligible for invoice factoring, which may restrict participation.
Asset-based financing provides greater flexibility, allowing businesses to leverage a wide range of assets, but it may require substantial due diligence and may tie up valuable collateral.
Factoring offers quick cash flow but often involves higher fees and can affect customer relationships due to the factor's direct involvement in collections.
Businesses must carefully weigh these factors to determine the best financing approach for their specific needs.
When considering the choice between asset-based financing and factoring, it's essential to weigh each option's unique advantages and disadvantages.
Asset-based financing involves leveraging the company's assets as collateral but may require a rigorous evaluation of your asset.
Factoring involves selling accounts receivable to a third party but can be more expensive in terms of fees.
Ultimately, the choice between asset-based financing and factoring should align with your short-term and long-term financial goals, the nature of your assets, and your willingness to cede control over certain financial processes.
Myos provides special funding choices:
1. Purchase financing: With this option, we handle the deposit and remaining payments so you can finance future orders with your manufacturer.
2. Stock financing: This method obtains additional funding for marketing, the introduction of new products, facility expansion, etc., by using your current inventory as security.
Additionally, Myos provides asset-based finance with reasonable terms:
✔️ You are not obliged to pay a certain amount in one go or lump sum, which might penalize you for repaying the money early.
✔️ On the outstanding loan sum, you are the only one who must pay a monthly fee.
✔️ Your fee will be based on your product scores.
✔️ You can pay back earlier to save more money.
✔️ Your loan repayment is not subject to a monthly schedule.
You can decide how much you wish to pay and pay back whenever you need to release a portion of your collateralized goods.
So, sign up and get a free, non-binding offer today!
.png)
.png)
