Factoring vs. Asset Based Lending: The Basics

You may have browsed our website, or heard of various cash flow financing options before. Perhaps you currently have a factoring facility or an ABL facility. Maybe you are an industry pro and know the ins and outs of these products well. But for many individuals and start-up businesses, these forms of financing are new and something they haven’t explored before. Here at Breakout we know these two products well, as they are our primary financing products: factoring and asset based lending arrangements.

Today we are going to outline the basic differences between the two and why a business may be better suited for one vs. the other.

Invoice Factoring

Factoring is a financing relationship based solely on your invoices, or accounts receivable. It is not really a loan. We are buying your invoices from you, and paying you an advance of up to 90% of the value of the invoice today. Then, when your customer remits payment, we send you the rest of the funds, less a small fee. You have access to capital as quickly as you can work and bill your customers, with none of the delays of waiting on your customers to pay. It’s really quite simple, and it eliminates a lot of traditional loan jargon: interest rates, APR, covenants, balloon payments, amortization, etc.

Asset Based Lending (ABL)

For those clients who qualify, an ABL Flex line of credit might be the better structure. ABL operates a little more like a revolving line of credit, but the main collateral is still your accounts receivable. For some clients we do finance a bit of inventory or equipment as well, but AR is the bread and butter of this product. In this instance, all of your collateral (your invoices) are grouped together on a borrowing base certificate (BBC). Each week you report new sales and collections to recalculate your available loan balance. Customers continue to pay through Breakout, and we review your funding requests and send out capital. While ABL rates can be slightly lower than factoring, a business needs to be a bit more established and able to provide consistent, accurate financial reporting in order to qualify. We typically look to establish ABL facility limits of no less than $500,000.

Which Is Right For You?

Although you may gravitate toward one product or another, each has it's own unique benefits in terms of being a better fit for your business today. Both products can quickly and easily provide working capital to your business, and neither requires you to give up equity or have strict covenants in place that can overcomplicate how you finance your business. Both also provide a a valuable lifeline to businesses experiencing rapid growth, branching into a new market, or just switching gears in some way.

While this was a very basic introduction to the products, we pride ourselves on offering tailored solutions and can only explain your options to you once we learn more about your business.

If you are curious how this might work, please contact us.