An asset-based loan (ABL) is a type of business financing that is secured by the company’s assets. Most asset-based loans are structured to work as revolving lines of credit. This structuring allows a company to borrow from assets on an ongoing basis to cover expenses or investments as needed.
How is an asset based loan different from factoring?
Asset-based loans are often confused with factoring. These products are different but provide similar benefits. Part of the confusion stems from the fact that both products use accounts receivable as their main collateral.
However, there are important differences. In a factoring transaction, the company does not borrow money. It sells its receivables to improve its cash flow. Receivables are sold and ledgered individually, rather than financed in bulk.
Lastly, the factoring company is involved in the collections process. This allows the finance company to work with smaller companies or troubled companies who would not qualify for an asset based loan.
Which product is better, factoring or an ABL?
There is no better product, per se. The “better” solution depends on your corporate needs, the type of collateral you have, the size of your company, and the general risk of the transaction.
Larger companies tend to prefer asset-based loans due to the lower ongoing cost and flexibility. Smaller companies tend to prefer factoring because it has low due diligence costs and is easier to obtain.
Types of Asset Based Financing
- Account Receivables
- Commercial real estate
- Investment real estate
- Personal real estate
- Equipment and Machinery