Asset Based Financing v. Factoring
Asset based financing (ABL) and factoring are two distinct methods of obtaining working capital for businesses:
- ABL involves using a company’s assets (inventory, equipment and accounts receivable) as collateral to secure a loan.
- Factoring involves selling accounts receivable to a third-party company at a discount. This provides immediate cash flow but at the cost of forfeiting a portion of the invoice value.
Both methods offer unique advantages and disadvantages making the choice between them dependent on a business’s specific needs and circumstances:
- Access to Capital: Provides access to substantial funds by leveraging a company’s assets helping businesses with immediate cash flow needs.
- Flexibility: In terms of the types of assets that can be used as collateral allowing for tailored financing solutions.
- Maintain Ownership: Businesses retain ownership of their assets as they serve as collateral rather than being sold.
ABL is less intrusive to customer relationships than is factoring and provides business owners with complete control over their assets.
- Interest Costs: Interest rates are higher compared to traditional (bank) loans due to the higher risk associated with these loans.
- Quick Cash Flow: Cash flow is immediate as accounts receivable are sold to a third-party company.
- No Debt:As factoring is a sale of assets (receivables), it doesn’t create debt on the balance sheet.
- Outsourced Collections:Factoring companies often handle collections relieving businesses of the burden of chasing payments. This however, does take control of client relationships away from business owners.
- Costs: Factoring involves fees and discounts on receivables which can be higher than interest rates on traditional (bank) loans.
- Loss of Control: Business owners lose control over customer relationships and collections since the factor takes over these responsibilities.
- Not Suitable for All Businesses: Factoring is generally more suitable for businesses with consistent accounts receivable and higher-profit margins.
About Celtic Capital
Companies looking for working capital to cover operating expenses, fund growth, increase buying power and take advantage of vendor discounts and rebates turn to Celtic Capital. With an appetite for the more complex transactions, Celtic Capital has a history of success in crafting creative, flexible asset based financing solutions from $500,000 to $5 million with no financial covenants.
As an independent lender, working with companies nationwide, Celtic Capital is willing and able to alter price and deal structure and expand lines of credit to handle its clients’ increased revenues; and when cash flow is an issue, will look toward providing an inventory facility to help offset lost cash flow.