Many small to medium sized businesses look to asset based factoring, often know as asset based lending in order to provide a quick cash flow. This article addresses the question of whether asset based factoring is a loan or not.
If you are a business owner or financial executive, then this article will hopefully answer some of your questions about asset based factoring.
Is Asset Based Financing a Loan?
The answer is no. It's is not a loan. Although sometimes it is referred to as an asset based loan, it is actually quite different. Factoring is the purchase of a businesses's accounts receivables and uses those receivables as collateral. When a business has good standing credit approved customers who normally take 30 – 60 days to pay their invoices. Asset based factoring is an interim measure in order used by businesses in the short term.
Usually a business can receive upwards of 80% of the entire amount of the gross invoice. Eventually, once the client pays the invoice directly to the factoring company, the business will then receive the remaining 20%, less a small percentage which is the fee paid to the factoring company for purchasing the receivable.
For example, if a business has receivables of $100,000, after approval, the factoring company will immediately disperse $80,000 to the business for it to use to cover for it's daily expenses. Thirty, sixty or even 90 days later, once the customer pays the invoice (directly to the factoring company), the factoring company then sends the remaining $8,000, known as the reserve to the business (less the factoring fee of say, $2,000).
For the factor’s security and in order for it to be able to advance literally millions of dollars to the client, the factor takes a GSA (General Security Agreement) over the client’s assets. Here is the difference between lending the client money and buying its receivables. In factoring, each time the factor buys a specific receivable or invoice, instead of making a loan.
All invoices are confirmed telephonically and the paper trail checked both for the client’s and the factor’s protection. NO interest is paid, but there is a fee earned.
One of the differences between a loan from the bank and selling receivables is that the factoring company is not concerned so much with the client’s business, as it is with the creditworthiness of the business's clients. If accounts receivable from a particular client are, and have been in good standing, then usually that is enough to receive immediate monies from asset based factoring.
Other advantages of asset based lending over a bank loan, is that factoring companies usually approve the application and disperse cash quickly. Also, there is no debt line in the business's balance sheet.