You Are Looking For Canadian Business Financing!
Unpacking the Differences: Factoring vs. Asset-Based Lending
You've arrived at the right address! Welcome to 7 Park Avenue Financial
Financing & Cash flow are the biggest issues facing businesses today
Unaware / Dissatisfied with your financing options?
Call Now! - Direct Line - 416 319 5769 - Let's talk or arrange a meeting to discuss your needs
Email - sprokop@7parkavenuefinancial.com
Asset-Based Lending and Invoice Factoring: Alternative Financing Options Explained
Invoice factoring loans are one area of business finance that has slowed the growth of traditional financing via banks in Canada.
It's no secret that asset-based lending is on the rise, while not that long ago, we can vouch, that alternative financing was pretty well unheard of. Industry stats both in the U.S. as well as Canada indicate more and more companies are turning to asset-based lending solutions.
A big challenge of any business is the cash flow challenges in times of economic uncertainty and when a business is focused on growing and expanding market share - traditional bank financing may not be available during times like this - that is when alternative financing options such as receivable financing/ factoring, and asset-based lending tend to be a popular solution - The real challenge is knowing which finance option is best for your business.
So why have asset-based financing solutions become one of the most popular financing methods for your company's working capital and cash flow needs?
Asset-based finance solutions and factoring work for a straightforward reason - they monetize one of the essential assets in your business, letting accounts receivable act as security.
WHAT IS INVOICE FACTORING?
Invoice factoring is a business financing option which allows businesses to finance outstanding invoices to a third-party commercial finance company in exchange for immediate cash. In traditional invoice finance factoring services, the financing company assumes management and collection of the receivable - The factoring agreement specifies the invoices are ' sold ' to the fiance company - in bank financing, invoices are assigned to the bank, typically under a general security agreement.
Key benefits of factoring invoices include the ability to access cash immediately without any debt coming onto the balance sheet - the company is simply monetizing a balance sheet asset - accounts receivables.
Small and medium-sized businesses that need working capital to fund day-to-day expenses and finance growth use factoring, which is not debt financing on the balance sheet.
THE INVOICE FACTORING PROCESS
New clients here at 7 Park Avenue Financial always want to know how these 'loans work. First of all, it's not a loan per se. It's simply a method of selling and cash-flowing your receivables as your generate revenues. Cash advanced on this type of financing is typically in the 80-90 % range and it's at the business owner's option to cash flow some or all of your a/r.
WHAT DOES FACTORING COST?
Confusion exists if only for the terminology commercial lenders and customers use around describing the cost of this financing.
That's because this finance method is costed as a ' fee ', not an interest rate. Factoring fees are typically between .75 - 1.25 %, so if your firm has good margins and a reasonable turnover in receivables you are an excellent candidate for factoring loans.
FACTORS INFLUENCING PRICING
Other factors that influence your overall cost include :
Size of your facility,
General creditworthiness of your customer base
The amount of time you use the funds for is probably ultimately the largest cost aspect of the financing. Good asset turnover and lower days sales outstanding lower financing costs!
While bank business credit lines are the lowest cost in Canada it's no secret that thousands of businesses simply can't access all or part of the business financing they require.
IS CONFIDENTIAL RECEIVABLE FINANCING THE BEST FACTORING SOLUTION?
At 7 Park Avenue Financial, we strongly recommend Confidential Receivable Financing facilities. They allow you to bill and collect your own accounts, generating the cash flow you need to run and grow your business.
A/R financing collateralizes company assets such as receivables, allowing you to finance the other parts of your business, such as inventory, equipment, real estate, etc.
For smaller to medium-sized firms that have exhausted forms of financing such as business credit cards, friends and family loans, collapsing personal investments asset-based lending via a business factoring loan is a logical step to financing operations and growth.
WHAT IS ASSET BASED LENDING?
Asset based lending is a business finance option that allows a business to use the physical assets of the business as a loan or line of credit. Assets financing under this type of facility include combinations of accounts receivable, fixed assets and equipment, inventories, and in some cases real estate.
Key benefits of this type of loan or line of credit include the ability to be flexible in drawing down funds as the business needs them and scale finance as sales and assets grow. Assets financing under the facility remain in the ownership of the company. Asset-based lenders are experienced in assessing values and advance rates on each asset category, ie receivables.
WHAT IS THE DIFFERENCE BETWEEN INVOICE FACTORING AND ASSET BASED LENDING?
The key difference between factoring and asset based lending lines of credit is the paperwork around the ownership of the invoices - Under a factoring agreement invoices are ' sold ' to the finance company. In contrast, in asset-based lending assets are secured as collateral for the financing.
In traditional factoring the factoring company is involved in the collection of invoices, but in asset based lending, businesses retain ownership and the customer relationship around collections. As we have noted companies choosing Confidential invoice financing are in fact allowed to bill and collect their own invoices while still enjoying the benefits of immediate cash access.
The timing around financing costs is also another difference - In invoice factoring the financing company purchase invoices at a discount. In contrast, interest rates/ financing costs do not start until facilities are drawn down on and used.
WHICH FINANCE OPTION IS RIGHT FOR YOUR BUSINESS?
Several factors will define whether your firm will best benefit from factoring or a full asset based lending solution - Those factors are:
Type of industry
Cash flow needs,
Growth goals
Factoring is best suited for businesses with higher volumes of invoices and the need for the firm to access immediate cash to cover business expenses and funding day-to-day operations - The ability to finance working capital investment in accounts receivable is a key factor
Asset based lending solutions such as term loans or business lines of credit are best suited for companies needing a full business line of credit that funds accounts receivable, inventories and other business assets. Companies that cannot access all the financing they need from traditional bank financing solutions are solid candidates for asset-based lines of credit.
Both solutions help companies with cash flow problems
KEY TAKEAWAYS: INVOICE FACTORING ASSET BASED LENDING
Invoice factoring is a solid alternative financing option for small businesses needing immediate cash
Invoice factoring is the sale and financing of outstanding invoices st third-party factoring companies
Asset based loans and lines of credit is a full-service financing facility which funds business assets and combines them into one facility
Both solutions, ie factoring and asset-based credit lines provide fast access to cash once facilities are improved and set up
A company will determine whether it needs invoice factoring or asset based loan solutions based on cash flow needs and the overall creditworthiness of the business
CONCLUSION - ASSET BASED LENDING VS. FACTORING
Both invoice factoring financing and asset based lending are creative and alternative finance options that can help a business grow via access to capital around the cash flow needs of the business.
Call 7 Park Avenue Financial, a trusted, credible and experienced Canadian business financing advisor with a track record of success.
FAQ: FREQUENTLY ASKED QUESTIONS / PEOPLE ALSO ASK MORE INFORMATION
Do I lose ownership of my invoices with invoice factoring?
Yes, invoice factoring involves the selling of outstanding invoices to third-party factoring firms to obtain funds via a cash advance prior to invoice collection - in traditional notification factoring the finance company manages collection and payments.
Does invoice factoring affect my customer relationships?
In invoice factoring the finance company has contact with customers in the collection relationship, while an asset based lending business credit line allows the company to bill and collect its own receivables as well as manage collections. customers.
What industries are suitable for invoice factoring and asset-based lending?
Any small or medium-sized business that requires working capital to fund operations and growth will benefit from these facilities' cash flow access. More established companies needing full services credit lines to finance a company's assets such as a/r, inventory and other assets will typically use an asset-based credit line.
Is factoring considered asset based lending?
Yes, factoring is often considered a type of asset-based lending because it involves selling unpaid invoices to a commercial lender, who then provides funding based on the value of those assets. Unlike traditional loans, factoring is sometimes non-recourse, meaning that the lender assumes the risk of non-payment by the debtor. The amount of funding available through factoring depends on the borrowing base, which is the total value of the assets/invoices being factored.
Factoring is often used by manufacturing companies and other businesses with rapid expansion and core operations that require additional money to pay invoices and support important differences in payment. The annual percentage rate and additional fees associated with factoring are typically higher than those of traditional term loans, and lenders view factoring from their perspective of collecting payments on the invoice assets purchased. Overall, factoring is a valuable financing option for businesses that require immediate payment and can benefit from the value of funding unpaid invoices.
Click here for the business finance track record of 7 Park Avenue Financial
No comments:
Post a Comment
Note: Only a member of this blog may post a comment.