Merchant Cash Advance, Asset Based Lending

Asset Based Lending Versus Factoring?

Posted by Factor Funding Staff on February 5, 2015

Asset Based Lending Versus Factoring

Business owners who cannot qualify for regular bank loans may wonder what financing options are available to them. If you have just started your business or you lack the credit to apply for traditional loans, you could consider either factoring or asset based loans. Before you apply for either, you would do well to recognize the distinctions between each type of business financing.

ABL and Factoring Approval Time

If you are on a tight schedule and need money fast, you may opt for factoring instead of an asset based loan. In fact, the approval process for factoring generally just involves verifying your invoice accounts. Once they have been verified, the factor may then extend you the money you need for your business, usually within just a few days' time.

Asset based loans, on the other hand, require that the value of your assets be verified before you can be approved. The lender must audit the assets that you intend to use as collateral for the loan. This process can take several days, if not longer.


Business owners who value their privacy may choose asset based lending rather than factoring. With factoring, the factor must contact your customers to verify their accounts. Your customers will discover that you are using factoring to help fund your business.

If you would prefer to keep your finance details to yourself, you may find asset based lending to be more appealing. In most cases, little interaction takes place between your lender and your customer, unless you are using your accounts receivable as collateral. Your customers typically will not know how you are funding your business if you choose this option.

Asset Based Loan and Factoring Risk

Both types of financing involve a certain amount of risk. However, factoring is generally considered to be the riskier choice because it is extended to new start-ups or businesses that are growing.

Asset based loans, however, are generally considered to be more secure because they are backed by your assets. This line of financing is extended as a line of credit to businesses that are more established or have grown significantly.

Collateral and Credit

Factoring generally proves to be the ideal choice for business owners who have bad credit and cannot get a loan from a bank. The application process does not revolve around how high a person's credit score is, but rather on the monetary value found with that person's business invoices.

Moreover, factoring does not require any collateral except for the invoices. People who utilize this option avoid having to put up assets like their car, house, insurance, or other valuable to secure the financing.

Asset based loans also revolve less around credit scoring and more on the value of a business' assets. However, the value of the financing itself can only be as high as the equity found in the assets put up to secure the loan. The most common types of assets used for this type of lending include:

  • Raw materials
  • Equipment
  • Accounts receivables
  • Inventory
  • Patents
  • Fixed assets

If you do not have such securities on hand or you do not want to risk them for financing your business, you may fare better by choosing factoring instead.


Both types of financing require that you pay the associated fees and interests that go along with the money you are lent. In most cases, factoring interest is charged every 30 days, which can be significantly more expensive than an asset based loan.

An ABL's fees are based on an annual percentage rate, which varies on average between seven and 15 percent. However, other criteria, such as the value of the assets and the credit worthiness of the applicant, can sometimes cause an asset based loan to be more expensive than factoring.

Knowing the difference and similarities between factoring and asset based loans can help you decide which finance method to utilize. Both of these options are viable choices if you prefer to avoid applying for or you cannot qualify for a bank loan.

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