Disadvantages of Asset-Based Financing

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Asset-based financing should be entered into with extreme forethought, as the disadvantages, although small, can weigh heavy on a company that is already struggling financially. The most obvious disadvantage of asset-based financing is the fact that the interest rate is slightly higher than most traditional loans. For a company that needs cash fast, however, this is a small pill to swallow. The most damaging disadvantage to asset-based financing is the fact that the financing is based on a company's current assets, and gives no consideration to what might negatively happen to the company in the future. For example, a company whose assets are worth $1000 today will still be repaying the same loan amount in 3 years even if their assets are only worth $600. This can cause a tight squeeze, increasing costs and cutting into already reduced profits.

Carefully weighing the pros and cons of asset-based lending in both the short and long term for a business is the only way to determine if it is the right method to use for getting cash fast. For a company with a strong asset base and slow credit history, it can be the boost needed to get the finances on track.
What is Invoice Factoring?

Invoice factoring companies provide businesses in need of instant capital with the funds necessary for them to operate. Invoice factoring is not a loan from the factoring company, instead the factoring company purchases the invoices owed or accounts receivables from the business. The invoices are sold to the factoring company who then instantly fronts a percentage (typically 65% to 90%) of the money owed. The invoices and account receivables are sent by and paid directly to the factoring company, which then sends the company the remaining amount due, less a small fee for the transaction.

Most businesses opt for invoice factoring, as opposed to a business loan, because the funds provided through invoice factoring are easier to obtain. And since invoice factoring companies base their decision to provide funds on the credit worthiness of the company's clients, as opposed to the company itself, no debt is added to the company.

About the Author

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