Asset-Based Lending vs. Factoring: What’s the Difference?

Red American long haul big rig

Small-business owners with non-traditional working conditions may also require non-traditional financing.

Standard bank loans suffice for well-established companies with well-established revenues; but not all companies operate in a stable market. Consider someone in the staffing or apparel business who has cyclical periods based on the season; or a startup company with secured clients, but without years’ worth of revenue data; or a machine shop that can’t afford to wait 60-90 days for its vendors to pay, but needs to purchase materials to keep orders running. These situations may be unattractive in terms of traditional loan criteria, but there are other financing options available.

Asset-based lending and factoring both use accounts receivable as the primary source of collateral. Both provide working capital during cash flow crunches, but in different ways. Here are the distinctions.

Asset-based lending (ABL)

ABL can provide a term loan or a revolving line of credit that a business owner can access as needed. The credit limit is based on the company’s assets, which are used as collateral for the loan. Assets can include inventory, accounts receivable, machinery and equipment. You don’t sell your assets, but you borrow against them.

The benefit of ABL is that the loan is based on liquidity value. Even during temporary downturns and fluctuations, the collateral value remains stable, guaranteeing the loan availability.

ABL is a great option for a business that has plenty of inventory and accounts receivable, but needs access to cash.

Factoring (also called accounts receivable financing)

If your business is likely to gain or lose capital in waves, then factoring may be a good option to lend stability. It is one type of asset-based lending.

Factoring is a cash advance on your own money. It is not a loan. There is no monthly payment.

Working with a direct lender frees you up from the collection process and allows the factor to take over management of your business’s unpaid invoices/receivables. When your company issues an invoice, the factor immediately pays up to 90 percent of it as an advance. Behind the scenes, the factor collects the full amount, and the issuing company gets the remaining portion, minus a service fee (typically ranging from 1-3 percent of the invoice).

Although factoring involves selling your invoices to a third party, you do not give up equity in your company. You remain in control of your business.

Factoring is based on the quality of your customer’s credit, not your own. Your borrowing amount can scale up or down depending on your invoices.

Recourse and non-recourse funding options are available. They differ in who is accountable in the case of nonpayment. In recourse factoring, you are responsible if your client fails to pay the invoice. In non-recourse factoring, you are not responsible, the factoring institution is, but there is an added fee.

Benefits of both

Asset-based lending and factoring both provide quick access to funds and neither is burdensome for the borrower. Support from a direct lender can provide peace of mind so business owners are able to focus on core operations and services.

These finance solutions serve companies of any size across a wide range of industries.

Asset-based lending

(term loan or revolving line of credit)


(a cash advance, not a loan)

Good for: rapid growth support, shareholder buyouts, mergers and acquisitions, expansion Good for: companies with slow-paying customers or unusual/unexpected cash outlay, increasing inventory, taking advantage of trade discounts
Typical uses: replacing or purchasing new equipment; alternative capital for companies exiting a traditional lending relationship Typical uses: providing basic working capital to industries that produce items for slow-to-pay retail stores; increased payroll support and cash on hand, especially during busy seasons

·         Based on total asset value, not minimum monthly profit margins

·         Does not require projected earnings forecasts

·         Flexible, seasonal over-advances may be possible

·         Frequent advances, including weekly or daily as needed


·         No debt accumulation; does not require monthly pay-down terms

·         Does not require projected earnings forecasts

·         Scalable and flexible

·         Borrowing on sales is immediate

·         Frequent advances, including weekly or daily as needed

·         Administrative support provided

Requires: an assessment/verification or field exam of collateral value Requires: orders/outgoing invoices/accounts receivables; notification to customers that invoices are being managed by a third party
Typical industry use: Small, midsize or large companies. Popular for manufacturing, retail, wholesalers, distributors, service industries. Typical industry use: Small, midsize or large companies. Popular for trucking, freight transportation, manufacturing, apparel and footwear, textiles, oilfield services, staffing agencies.

Call Crestmark for a flexible financing solution. We help. 888.999.8050.

Subject to credit approval.