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Asset Based Factoring - What is Asset Based Factoring?

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It is no secret that the economy has been suffering in recent years. The uncertain climate surrounding the economy has made most banks apprehensive about lending money. As the economy is turning slowly, one potential way to get money for your business is to consider asset based factoring. Asset based factoring, also called asset based lending, essentially means that your company gets immediate cash and credit that is based upon the value of your company assets, including inventory, accounts receivable, or equipment.

Asset based factoring is not the same as a regular bank loan. With a regular bank loan, your business is usually held as collateral. Your business credit is evaluated, and you are given a loan with a specific interest rate that must be repaid in a set amount of time. With asset based factoring, the credit is based on that of your customers. You are only paying fees on the assets you send to the lender, instead of paying fees on a fixed amount that you borrow.

In broad terms, asset based factoring means that a company is selling its assets for immediate cash. If a company is in a tight financial situation, this could be an option. For example, a company can present invoices to the lender, who will pay a percentage of that invoice to the company immediately. The percentage depends on a number of factors, but generally falls between 80 and 90 percent. The lender verifies the invoice and the customer pays the lender. Upon payment, the lender pays the company the remainder of the invoice minus their fee.

A factoring lender may or may not have the right to come after a company if their customers default. This capability will be defined in the underwriting. With no recourse factoring, the company cannot be held responsible should the customer fail to pay the lender. If the factoring lender is using no recourse factoring, the fees will likely be higher due to the greater risk.

For many companies, asset based factoring can mean the difference between surviving and failing. A lot of small and private businesses rely on customer payment to thrive. For example, if a company provides electrician services and customers are slow to pay, the business could suffer greatly. In this economy, failure to pay by customers has become increasingly common. The result is a bunch of legal headaches for the company that provides services. With asset based factoring, the company is guaranteed to receive a stream of revenue without having to worry about customer payment. For some, the fees are well worth the reduction in stress and aggravation.

Asset based factoring is similar to a paycheck cash advance for businesses. You are getting advanced cash for something you have in exchange for a small fee. If you are confident that your business can collect on their invoices, asset based factoring probably is not something you would consider. However, if your company is struggling, you may need to look in to it as an option for financial security. Companies need cash flow to cover a variety of expenses, not to mention make money. Asset based factoring will provide that to you. Your profit margin may decline, but at least you are getting profits.

In a bad economy, asset based factoring may be the only option. Banks are not inclined to lend money to a struggling company. That is why asset based factoring has increased in popularity. It is guaranteed money for the company and guaranteed payment for the bank. As for the customer, it is all the same to them.

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