How Asset Based Factoring Differs From A Bank Loan
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.
So the question is, is Asset Based Factoring a loan? Or how does asset based factoring differ from a traditional bank loan and what are the advantages of factoring over a loan?
The answer is no. It's is not a loan. Factoring is the purchase of a business's accounts receivables and use of 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 used by businesses to obtain money 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 for it's daily operations expenses.
Thirty, 60 or even 90 days later, once the client 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 factors 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 clients assets. Here is the difference between lending the client money and buying its receivables.
In factoring, the factor buys a specific receivable or invoice, instead of making a loan to the business. All invoices are confirmed by telephone and the paper trail checked both for the clients and the factors 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 clients 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 factoring 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.
One more major advantage is that a factor can advance a lot more money than a bank. The reason for this is simply that a factor relies heavily and almost totally on the clients customers.
by: Tracy Matthewman
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