This leaves many businesses to wonder, “What’s the difference? Is it really apples and oranges?”

Actually, the fruit analogy works here. Factoring and Asset Based Lending (ABL) are both types of financing (or fruit, if you will) offered by specialty business financing companies. They commonly involve funding based on receivables but the differences come down to the variety of financing.

Asset Based Lending

The asset-based loan is just that – a loan. The company borrows money incurring loan fees and interest charges. The loan is collateralized or backed by assets of the business. This can include the account receivables but can also extend to other assets including inventory, raw materials, equipment, patents, or fixed assets.

Factoring

Rather than a loan, the factoring transaction involves the purchase of the invoice itself. The factor buys account receivables at a discount through a cash advance. All or a portion of the reserve is released upon payment of the invoice by the client’s customer. Instead of earning interest the factor earns a discount or factoring fee.

All in the Family

When an asset based loan is secured just by the accounts receivable the distinction between the two can become blurred. Both the lender and the factor usually verify invoices and use some sort of lock-box system to accept payment on the invoices.

The costs can vary greatly so neither factoring or ABL can be deemed the most or least expensive. It is safe to say that specialty financing is generally more expensive than traditional bank financing. It is best to shop around and compare the costs and benefits of both options.

Factoring and asset based lending can both be categorized as types of asset based financing, with the big difference being an asset loan versus an asset purchase at a discount. At the end of the day, both can be a tasty option if it fills the company’s appetite for working capital at a cost that still enables growth and profit.