When you need working capital to keep cash flowing through your business and you operate on an invoicing system, one of the most accessible ways of freeing up that cash is by using those invoices. It’s an option that sidesteps long-term debt and the long approval times that can come with new loans. The question is, do you factor or do you get an advance against payment via asset-based lending programs? Both options have their uses, so it’s not as simple as deciding once which to use. Each time you need cash out of your invoices, you should stop to think through the options before committing to a path.

Benefits of Cash Advances Against Invoices

Financing assets means you do not move them off your books. As a result, the financing company doesn’t pick up the same kind of additional risk as a factor who buys your invoices outright. Usually, the result is that you get more money than factoring would make available. You also have the chance to recoup additional funds after the customer pays, because any additional balance left after paying off your advance and the lender’s fees will be forwarded to you. Approval is fairly fast, especially compared to the weeks that traditional bank loans take.

Benefits of Factoring

Using a factor instead of asset-based lending means selling those invoices and being able to take them off your books. There’s nothing to repay, and factors assume the risk of nonpayment for themselves when they buy the debt from you. This is part of the reason why factoring usually yields a smaller percentage of the invoice’s face value. The upside is that you are totally done dealing with that invoice and you recover at least a portion of its value instead of waiting for a possible final payment down the road. Usually, this kind of arrangement closes faster than an invoice financing deal, although it’s worth noting that selling invoices can unsettle some customers.

When To Use Asset-Based Lending

If you’re pretty confident your invoices will be paid in a timely manner, it’s a lot easier to borrow predictably against them. On the other hand, lending resources can have steep fees for invoices that go unpaid past a contractual time limit. If you’re worried that could complicate the transaction, factoring was made to handle your current situation. Neither replaces the other in your financial toolkit, but you might not be able to access both services from the same provider. Make sure you know where to go for each one when the time comes, and take control over your business finances.