What is Factoring?
- It is the purchase of invoices for cash to provide working capital to the seller of that receivable.
- Currently, factoring volume exceeds $200 billion in the United States.
- Unlike collateral lenders, Factors are providing both liquidity and credit services to their clients.
- Factors generally earn a return on their money in two ways; First they are paid to approve the credit quality of the invoice before purchase (so clients do not ship or service customers that are not credit worthy), this is called a factor fee; second they charge interest on the money advanced against the invoice until it is collected, this is the lending portion of the in the factoring process.
- Most Factors will earn from 1.5% – 3.0% per month (18% – 36% annualized) from the combination of the fee and loan interest.
- Most Factors will advance 75% – 90% of an invoice. The highest advance rates are for businesses with little dilution in collection of their invoices such as staffing or transportation companies.
What is Asset Based Lending (ABL)?
- ABL lenders look to collateral and are more flexible on cash flow and capital; higher rate ABL lenders can even overlook some (but not all) credit flaws.
- Many focus on lending against A/R and Inventory but will take equipment and real estate as security as well.
- Rates can vary from just 1% above a bank to 3 – 4% per month for inventory only lenders.
- Many smaller ABL lenders are independent; the larger ones are bank owned.
- The bank-owned ABL Lenders have lower rates and more stringent lending criteria.
- Some smaller ABL lenders may go as high as 90% advance on A/R; bank-owned are more likely at 80%.
Factor vs. ABL Differences – Key Considerations
- Factors rarely lend on inventory or equipment.
- ABL lines usually start at $500K and up; many ABL lenders minimums are much higher.
- Factors will go small, as low as $10K and/or one invoice.
- Most ABL lenders are bank-owned or have similar underwriting requirements. Those that do not (lend to money losing entities and/or highly leveraged companies) cost the same as factors.
- All ABL lenders require a personal guarantee; many factors do not.
First U.S. Finance LLC contracts with both Factors and Asset Based Lenders; they are part of our toolbox to help clients obtain capital for seasonal fluctuations, equipment expansions and cash flow management. Both options can be used one time or periodically to make sure a business continues to grow and flourish. Please contact us with any questions.