Asset-Based Lending vs. Factoring

Published: 08 September 2022
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Both provide working capital during cash flow issues, but in different ways. Here are the differences. 

Many small business owners with non-traditional working conditions also need non-traditional financing. 

Standard bank loans may work for well-established companies with regular revenues, but not all companies operate in a stable market. Consider those in staffing or clothing businesses that have cyclical periods based on the season, or a startup that has secured clients but lacks years’ worth of revenue data; or a machine shop that can’t afford to wait 60 to 90 days for payments from vendors but needs to buy materials to keep producing orders. In terms of traditional loan criteria, these situations may be unattractive, but alternative financing options are available.  

Both asset-based lending and factoring use accounts receivable as their primary source of collateral. Both provide working capital during cash flow issues, but in different ways. Here are the differences. 


Understanding asset-based lending (ABL) 

Asset-based lending provides a term loan or a revolving line of credit a business owner accesses as needed. The credit limit is determined by the company’s assets, which are used as collateral for the loan. Assets may include accounts receivable, machinery and equipment, or inventory. You don’t sell your assets – instead you retain and borrow against them.  

A main benefit of ABL is that the loan is based on liquidity value. This means that during temporary economic downturns and market fluctuations, the collateral value remains stable, with little impact on the loan’s availability. 

ABL can be a smart choice for businesses that have a lot of inventory and accounts receivable but need ready access to cash.  


Understanding factoring (aka accounts receivable financing) 

For businesses prone to gaining or losing capital in waves, factoring may lend stability. Unlike a loan, factoring is a cash advance on your own money. There is no monthly payment.  


Working with a direct lender frees you from the collection process by allowing the factor to take over management of your business’s unpaid invoices and receivables. When your company issues an invoice, the factor may pay up to 90% of it as an advance immediately. Working independently, the factor collects the full amount, and the issuing company receives the remaining amount, minus a service fee (typically ranging from 1% to 3% of the invoice). 

Although factoring involves selling your invoices to a third party, you don’t lose equity in your company – instead, you remain in control of your business.  

Factoring is determined on the quality of your customers’ credit, not your own. Your borrowing amount can scale up or down, depending on your invoices. 

Recourse and non-recourse funding options are also available. They differ in who is accountable in cases of nonpayment. In recourse factoring, you are responsible if your client fails to pay the invoice. In non-recourse factoring, the factoring institution is responsible, but there is an added fee.  


Benefits of both asset-based lending and factoring 

Asset-based lending and factoring both provide fast access to funds without being burdensome for the borrower. Support from a direct lender can provide peace of mind, allowing business owners to focus on core operations and services. These two finance solutions serve companies of all sizes across a wide range of industries.  


Asset-based lending 

(Term loan or revolving line of credit) 


(A cash advance, not a loan)  

Good for: shareholder buyouts, rapid growth support, expansion, mergers and acquisitions 

Good for: companies with late-paying customers or unusual/unexpected cash outlay, increasing inventory, taking advantage of trade discounts 

Typical utilization: purchasing or replacing or new equipment; alternative capital for companies leaving a traditional lending relationship  

Typical utilization: providing basic working capital to industries that produce items for slow-to-pay retail outlets; increased payroll support and cash on hand, especially during peak seasons  


Based on total asset value, not minimum monthly profit margins 

Does not require projected earnings forecasts 

Flexible, seasonal over-advances may be possible  

Frequent advances, including weekly or daily as needed 


No debt accumulation; does not require monthly pay-down terms 

Does not require projected earnings forecasts  

Scalable and flexible 

Borrowing on sales is immediate 

Frequent advances, including weekly or daily as needed 

Administrative support provided  

Requires: an assessment/verification or field exam of collateral value 

Requires: orders/outgoing invoices/accounts receivables; notification to customers that invoices are being managed by a third party 

Typical industry use: small, midsize, or large companies. Popular for distributors, service industries, manufacturing, retail, wholesalers

Typical industry use: small, midsize or large companies. Popular for apparel, oilfield services, trucking, textiles, freight transportation, staffing agencies, footwear, and manufacturing   


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