All lending options are not the same. Period. Everything has a value and a purpose in certain circumstances but all options are not alike. In our industry, the differentiation of asset-based lending from invoice factoring is a common misconception.
But there are clear differences between the two – especially in government contracting -, and it’s not just semantics that separates them. It’s all in the fees.
Know Your Financing Options
In government contracting, there are many options for financing offered at different stages of your business’s life cycle ranging in cost. On one side, you can take on equity partners, try purchase order financing, or merchant cash advances, all costing you the most. The other side of the spectrum is traditional lending at your bank, which requires the most effort but usually costs the least.
As you enter the industry, lacking things like past performance history and audited financial records, you are limited to the options we refer to as alternative or non-traditional financing. This is available when you are not yet ready for a traditional lender like a bank, so you seek assistance in alternatives like asset-based lending and factoring. Outside of your banking relationship, these are the most popular options, and there are distinct differences between the two.
Invoice Factoring and What to Avoid
Invoice factoring has long been used as a tool for government contractors’ working capital needs. In a nutshell, they take your entire invoice, offer a discounted rate from the total amount to buy that invoice, and charge their fees on top of it. The actual amount you need to borrow is not a factor in factoring because you “get what you get and you don’t throw a fit.” (use factoring vs Parabilis linked to this)
The additional costs incurred, on top of the amount shaved from the total invoice, is in factoring fees. These typically consist of discount fees, purchase advance fees, transaction fees, and unused fees which are added together to make up the total cost of factoring the invoice. The business is not given an option of the amount to borrow from the invoice, and the invoice value is gauged more by the reputation of the Prime that paid you rather than the work your business performed to earn it.
In some cases, if the Prime is not reputable enough, the factoring company may not be willing to take the risk. Essentially, the value of the relationship with the contractor for the factoring company is predicated more on who the contractor does business with rather than the value of the time and talent of the work they were paid to perform.
However, factoring’s fatal flaw lies within the total cost to the borrower; with hidden fees and limited flexibility, factoring is often an expensive and unsustainable remedy for working capital shortages.
Advantages of Asset-Based Lending
True, asset-based lending, like the option with Parabilis, allows the contractor to utilize accounts receivables, delivery orders, and unbilled labor to borrow the exact amount they need. You will incur only two fees: A one-time commitment fee and your monthly, fixed- interest rate which is paid only when you are utilizing the line of credit.
Parabilis values a company’s partnership based on the strength of the leadership and the work performed and not on who is paying for the work. Our product allows for organic growth in your market by providing letters of credit and proof of financial capability that will facilitate your potential to win bigger contracts and enhance your company’s overall progression.
The proof is in the pricing.