Note from Editors:
Newly launched companies have to build up credit scores, since #lenders are not prepared to take a big risk on them. When in need of extra cash, these companies turn to factoring their receivables. Another way of raising cash is to avail of asset -based loans.
by Ami Kassar
When you launched your business, chances are didn’t have too many options for borrowing money. It takes time to build up a credit score and lenders aren’t willing to take a big risk on new companies. As a result, many new business owners turn to factoring their receivables when they need extra cash. If you’ve been in business for a few years though, you may be able to upgrade your #financing plan. At this point, there’s a natural progression to adding asset-based loans to go along with factoring.
The limitations of factoring.
With factoring, you sell off some of your customer invoices to a financing company, known as a factor. The financing company pays you for the invoice amount upfront, minus their fee, and then takes over collecting payment from your client.
While factoring is convenient, it can be a little limiting. You can only borrow to the extent that your business is making sales and collecting account receivables. If the only way to grow your revenues is by borrowing money to expand, factoring leaves you stuck. You aren’t making the sales needed to borrow more but you can’t make those extra sales without the additional financing.
Advantage of taking out an ABL.
An asset-based #loan could be your way out of this situation. In an ABL, you borrow money and then pay it back with interest, like a traditional bank loan. The key difference is that you’re securing the loan with a valuable business asset, like your inventory or a piece of machinery. Most businesses don’t own these assets when they’re just starting out but it’s likely that after a few years, you now have the resources to take out an ABL.
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Note: Featured Image credit to i3.apollo.lv