Asset-Based Factoring is a favored approach of financing illiquidity for startups, mid-sized businesses, or any other business that cannot get sufficient bank lines. It is also referred to as Asset-Based Lending or Asset-Based Financing.
It consists of companies selling their accounts receivable for immediate cash. For a business to grow, it requires constant cash flow without which it becomes irrelevant. A Factoring company usually funds about 80% of confirmed unpaid gross invoices within 24-hours of delivery of completion of the rendered service. The remaining 20%, less discount is paid immediately the debtors clear the invoices.
Judging from history, when there are economic challenges, factoring becomes the most practical option. When it is hard to get bank loans, most businesses consider paying a much higher rate to have the factor’s immediate working capital. While banks only look at the clients’ history, balance sheets, and ratings, factoring institutions only focus on their clients’ customers. The essence, the business does not incur debt itself; a company buys all the invoices from 100% credit-worthy customers.
Many clients love this type of funding since they know that unless the factor checks their customer’s credit, the factor’ recourse can make the factor claim unpaid invoices from the client. From the perspective of the customers’, there is no difference issuing payments directly to the factor since the customers are rather the huge firms that want to see a normal growth of their suppliers preserve their own future business. Factoring doesn’t cost the customer any money, and they have similar time to pay as if no factoring happened.
Businesses with existing loans can still factor their receivables provided they let the lender know if the bank has filed a lien against its accounts receivable. Still, some banks can subordinate to the factor because it knows there is assured growth with the factor so they retain a growing feasible client. Also, a business in arrears with its source deductions can still be approved for funding through this model. Those facing bankruptcy may be considered on a case basis.
It takes less than ten days from the time of application to the time of getting the funding, and funds are dispersed within 24-hours of a term sheet. It’s a model that gives business owners access to fast cash, leveraged against their credit-worthy clients. Today, a majority of businesses are looking to factoring their receivables to allow them to grow in the short term.