The concept of factoring, in financial terms, indicates the selling of invoices in exchange for immediate money. The major difference between a bank loan and factoring is that 'credit worthiness' is taken into account for granting bank loans, while receivables are given importance in the latter. Read on to know the theory of asset based factoring.
What is Asset Based Factoring?
- In this factoring, payable invoices are sold to a factoring company at the cost of total due of invoices.
- The advantage is that new businesses, which need money, are provided with immediate cash flow by the factoring companies. Those companies which do not have significant fixed assets, may find it difficult to secure a loan. Thus, asset based approach is good for them.
- In case of asset based financing, whenever a customer is invoiced, one has to just send a copy of the invoice to the factor. Around 90% of the advance is paid by the factoring company to the businessman.
- The factor also takes up the responsibility of collecting the money/bill from the customer. It can be used for corporate restructure, business refinance, business turnaround and rescue, growth and sales funding, management buy outs, and mergers and acquisitions.
- The assets used for the purpose of factoring can be grouped into three categories: fixed assets, current assets, and intangible assets.
- The fixed assets include commercial vehicles, property, machinery, etc.
- Stock inventory and account receivables form the current assets, while the intangible assets could be patents, brand names, trademarks, etc.
Benefits of Asset Based Lending
- The companies which are not sure about gathering/setting up the required capital, to meet a business order/demand, benefit a lot from asset based lending.
- The fact that a sizable amount is received by those businesses with asset based factoring, gives them the confidence to accept orders.
- The wholesaling and manufacturing businesses would especially benefit from the concept of factoring.
Asset Based Loans
- The concept of asset based loans should not be confused with asset based factoring.
- These are generally short term loans, which are secured by making use of company's assets.
- The assets which could be used for such business loans include the inventory, accounts receivable, different types of equipment, and land holding.
Tips for Asset Based Factoring
The following tips would help to manage your finance carefully.
- The fees and rates charged by a factoring company is largely dependent on the invoice amounts. Some companies however, have different policies; they have a fixed rate and are independent of the amount of invoice.
Therefore, companies with higher amounts of invoices would benefit from this policy. Those with lower values have to pay the same amount as that of others.
- Some of the factoring companies set a time limit on the invoices payable. So it is advisable to know the time limit, beforehand.
- Reading the rules and terms printed in fine print is important to have a transparent and clear business deal. The important aspects of the transaction should not be missed out by neglecting the fine print.
One should clear all the doubts in their mind, before making a deal. It won't leave any problems to deal with later. It's advisable not to proceed with the deal, if any of the points are not understood clearly.
The information and tips mentioned earlier give us a fair idea of what actually is asset based factoring and the steps one needs to take in order to proceed in a hassle-free manner.