Asset-Based Loan vs Factoring: The Real Comparison
Factoring sells your invoices. ABL lends against them. For most growing B2B companies, ABL is dramatically cheaper — but factoring wins on speed and flexibility. The decision usually comes down to size, customer relationships, and bookkeeping discipline.
Mechanics: factoring
Factor purchases the invoice, advances 80–90%, holds 10–20% reserve. Customer pays the factor directly. Reserve releases (minus fees) when invoice closes. 'Notification factoring' — customers know. Some factors offer 'non-notification' at higher cost.
Mechanics: ABL
Bank or non-bank lender extends a line of credit against an eligible borrowing base (typically AR + inventory). You bill customers normally, they pay you, you sweep the lockbox to the lender. Borrowing base recalculated weekly or monthly.
Pricing comparison
Factoring: 1–4% per 30 days (effective APR 12–48%). ABL: SOFR + 2–5% on drawn balance plus 0.25–0.5% unused fee (all-in 7–13% APR). ABL wins on cost dramatically once you cross ~$2M revenue.
When factoring wins
Revenue under $1.5M, weak balance sheet, customer concentration, you want the credit work outsourced (factor does collections). Spot factoring (just hard-to-collect invoices) is sometimes the right one-off solution.
When ABL wins
Revenue $5M+, decent gross margins, internal AR team that can manage collections. ABL gives you cheaper capital and keeps the customer relationship clean. Many growing companies start with factoring and graduate to ABL at $3–5M revenue.
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