Asset based lending is a short term method for acquiring cash. A business obtains an asset based loan utilizing its balance sheet assets: inventory, receivables, or collateral excluding real estate. Since the loan is secured the interest rates are lower as opposed to an unsecured loan. Many times the business owner uses these funds for meeting payroll or building inventory.
When a business applies for an asset based loan it contracts its assets to secure the loan through a bank or a commercial financing company. The lender goes over the company's credit record, ascertains if the assets are liquid, and considers how long the company has been doing business. Accounts receivable financing is the usual form employed to get the loan. The business owner retains ownership of his assets, but the lending institution can pinch them, if he defaults.
If a company secures the loan through its inventory, the lender will probably contract a bonded warehouse to house goods and overlook the inventory.
The lending rates are usually higher at a commercial financial company than those at traditional banks, even though, the rates have gone down more recently. Fresh invoices bring about 75% of their face value.
Assets based loans have two advantages over traditional loans for a small business.
Assets based loans have two disadvantages.
Factoring or debt factoring is another option. A business sells its invoices to a financial company, known as a factor, in a contract form. The factor lets you draw monies against the capital owed to your company. Businesses normally use this resource to increase their cash flow or lessen administrative expenses. Established businesses are more likely to use factoring. The factor moderates its risks by controlling which companies your business works with, thus, assuring payment.
The credit risk is placed on the factor. You may receive as much as 80% of the invoices face value up front. After the factor makes collection, you recoup the remainder, less about 50% for fees and interest. Institutions that offer factoring basically supply two services.
Invoice discounting is another method of extracting funds against your invoices. But you kept control of your ledger. This method supplies credit insurance and support services. Factoring and invoice discounting are categorized as invoice finance, though ignoring their distinctions, people may call both of them factoring.