Financing Solutions to Bridge Cash-Flow Gaps: ABL and Factoring

It’s no surprise to small and medium-sized businesses that securing ample lines of credit offered by traditional banks and lending institutions is, well, tough business. It requires a strong and stable balance sheet and a track record of good credit.

Among small and medium-sized businesses, these requirements are often out of reach. Faced with critical cash-flow crunches because of issues ranging from expanding the business and fulfilling a big order to meeting operating expenses or recapitalizing the firm, these businesses have fewer financing options than their larger counterparts. But, as any business owner knows, working capital is key to growth in both the short term and long term.

Fortunately, as the demand for specialty finance intensifies there are creative financing alternatives available to bridge cash-flow gaps. Two of them, asset-based lending (ABL) and invoice financing, or factoring, look to the assets of a company as collateral for the loan.

The Gibraltar Business Capital team answers three common questions about these financing solutions.

  1. What’s the difference between the two? Among the biggest is that an ABL facility can be advanced against a variety of assets including inventory, accounts receivable or equipment. An ABL line of credit is based on a percentage of the company’s assets used as collateral. It is a debt-service facility that must be paid back even if a customer doesn’t pay the company’s receivable.
    Factoring, also referred to as invoice financing or accounts-receivable financing, is based on the value of a company’s accounts receivable. Instead of waiting 30, 60 or 90 days to get paid, factoring allows businesses to convert unpaid invoices into cash immediately. Payments received from customers are used to pay down advances less financing costs.
  2. How are the credit limits set? In both instances, credit limits are based on the value of the assets being leveraged as collateral. Creative financing companies, like Gibraltar, will look beyond traditional asset valuations to include other parameters, such as work-in-progress or the composition of a pool of receivables – which may provide more liquidity and working capital to the business.
  3. Is one better than the other? Generally speaking, no. But the “better” solution certainly will depend on the company and its needs. Both financing solutions allow companies to get instant access to working capital without having to navigate the strict regulations required by traditional banks and financial institutions.

Do you have questions about filling gaps in your working capital? Contact a member of our team to discuss asset-based lending and factoring. Click here to download a copy of Factoring Fundamentals: Access Working Capital Via Invoice Financing.

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