When to Choose Factoring vs. Asset-Based Financing | Intrepid Finance

When to Choose Factoring vs. Asset-Based Financing

Have you hit a roadblock with your logistics company? Perhaps you’re preparing for the next stage of your tech start-up and are limited financially? Starting and growing a business demands capital and sometimes, the finances aren’t readily available. 

There are several financing options that can help businesses grow without struggling with cash flow. Factoring and asset-based loans are both strategic options for cash flow management.

Comparing Factoring vs. Asset-Based Financing

Although both factoring and asset-based financing are viable options for growing businesses, the options are better suited to specific situations. 

Factoring is a form of asset-based financing where businesses are given access to the value of their open invoices. By selling their accounts receivables to another company, businesses don’t need to wait for invoices to be paid. Instead, cash flow is available instantly through a factoring strategy.  

Asset-based financing consists of an asset-based loan or line of credit that is secured by business collateral. For example, business inventory, equipment, property, or accounts receivable (AR financing). Normally, liquid collateral is preferred. 

The main similarity between factoring and asset-based financing is that both are considered short-term solutions to financing. The solution is especially useful during a transitional stage. By providing cash flow, they can help a business survive when a traditional bank loan isn’t an option. 

There are a few differences between factoring and asset-based financing. For example, factoring offers a flexible solution by allowing businesses to select which invoices they want to sell. It’s fairly easy to qualify for factoring and it follows a simple fee structure. 

Asset-based financing is usually more expensive, but the process is usually easier to transfer funds. AR financing offers less flexibility as all accounts need to be submitted as collateral. In addition, businesses need to showcase a minimum monthly sales threshold to qualify. 

When to Use Factoring

Factoring is a convenient option for small to medium size businesses that need the value of their open invoices to keep operations ticking over. Smaller and newer companies are usually limited by the traditional financing options that larger businesses have available.  

Other companies that can benefit from factoring include those with unfavorable credit, recent bankruptcies, and when struggling with conservative lenders. A few industries that frequently benefit from factoring include transportation, staffing, oilfield services, and construction. Factoring also benefits businesses that work with commercial or government clients. 

Businesses that need cash to fund inventory purchases or payroll can consider factoring as a viable solution. The process turns invoices that are due in less than 90 days into immediate cash. The primary requirement is that the customer has a reliable credit history. 

When to Use Asset-Based Financing

Asset-based financing is usually pursued by businesses that are more established and bring in higher revenue. While the solution is typically used to pay for expenses when the company is experiencing gaps in cash flow, it is also an option for several other situations. 

For example;

  • Startup company financing
  • Refinancing existing loans
  • Financing growth
  • Mergers and acquisitions
  • Management of buy-outs and buy-ins

AR financing is a strategic solution for cash flow and is a common option for small to medium-size businesses in various stages. The solution is faster than a traditional loan and offers unique benefits for instant access to finances.  

Get Financing Assistance Today

At Intrepid Finance, we offer financing solutions for companies in various stages of growth. We offer a selection of different financing solutions to best suit individual business needs – including factoring and asset-based financing. Contact us at 317.207.2235 to find out more.