How is Invoice Factoring different from Asset Based Lending - Part 2.
This is the second installment in a series of articles that explain the difference between invoice factoring and asset based lending.
Click here for a link to the first article.
This second article will focus on the basic characteristics of an invoice factoring facility.
The main distinction between invoice factoring and asset based lending is that a factor will have more control over the accounts receivable they advance against. A factor will typically book each invoice in their system and will require that the customers of its' clients pay them directly.
By having this increased level of control factoring companies can generally document and fund a new facility faster than asset based lenders. Because asset based lenders have less control over the assets of their clients they have to have things like, loan covenants, field exams and require CPA prepared financial statements. These requirements take time and cost money. In my experience it takes between 30 and 90 days for an asset based loan to be funded where an invoice factoring facility can be funded in a matter of days.
The following is brief list of the most important aspects of an invoice factoring facility:
- Size - Facility sizes range from $50,000 to hundreds of millions.
- Collateral - May be limited to cash and accounts receivable but could also include all business assets.
- Recourse - Full personal guarantees typically required by all non-institutional owners.
- Customer Notification - Customers know factoring companies are involved. Customer usually receive an assignment letter that notify them to pay the factor directly and invoices are labeled "due and payable to a factoring company"
- Financial Covenants - Typically none.
- Reporting - Clients will be required to report to the factoring company any issues that could affect the accounts receivable the factoring company has advanced against.
- Pricing - Pricing fluctuates greatly between 1% and 4% for every 30 days an invoice remains unpaid.
To learn more about online, electronic invoice factoring click the link below.
