When you are just getting started with a business and get a big order, it’s a great opportunity. This order can help you to get exposure, establish your market, and get future business.
However, all these benefits come with risks, and the biggest of them is a financial loss.
You might have to take a huge amount as a loan for fulfilling the order, which opens you to risks. For instance, let’s say the client goes bankrupt or delays the payment; your business will have to deal with debt payments
Factoring or, more precisely, asset based factoring can help you to prevent such unpleasant results. This post will introduce you to this system and also share its benefits over traditional lending.
What Is Asset Based Factoring?
Asset-based factoring is an innovative lending method that uses the clients’ assets as collateral for your loan. Here, you have an asset managing company that uses the client’s past history to analyze their reliability and offers loans accordingly. This company also takes care of the payment at your end and collection at the client’s end.
Let’s understand this with an example. Let’s say that you have a startup named A that makes furniture that has recently received a large order form a company X. Now, you had the financing for the work and completed it on time, but the client needs time to pay for it.
Then you will have to wait anywhere from a few days to upto 60 days, which is a long period. You may feel it difficult to sustain a smooth flow of cash and work. Now, here comes the asset based finance factoring company.
If you have opted for it, the company will come into action and provide you with part of the total fraction as soon as you submit the order completion statement. The company will also keep track of the client and remind them of the payment on time.
Once the client pays, the lending firm will deduct the amount they paid to you and transfer the remaining part to you. In case the client fails to pay the amount, you will still get your full payment. The management company will take care of payment settlement of the client on their own. You don’t have to worry about it or have any debt to pay.
Is Asset Based factoring better than lending?
The asset based finance factoring is by far the best lending process for startups. Here’s how it’s different from traditional lending.
Low Risk And Work
Unlike traditional lending, asset-based factoring doesn’t create a strain on the business owners. It focuses on clients and their credibility for the order they are placing. The factoring company also takes care of payment and handles everything for you. Therefore, you won’t have the risk of debts and don’t check with the customer for payment every now and then. It’s a win-win situation.
The factoring companies have sophisticated asset based business software that maintains records of companies. You don’t have to check the background and the credibility of the customer manually. They also take care of the payment and other similar aspects for you.
The biggest benefit of the asset based finance factoring is that it depends on the customer or client’s credit. It means that if the customer cannot make the payment or goes bankrupt, the factoring company will recover the amount from them and not you. Therefore, your financial valence will stay intact.
The asset based factoring is a great alternative to the traditional lending approaches. It’s customer focussed and does not affect your startup in any possible way. No matter what happened, you will get paid and won’t have to suffer any losses. So, if you have a small scale company or a startup with a large order, find a factoring company and use its services. You won’t regret it in any way.