Most businesses experience times where cash flow is tighter than a post-Thanksgiving waistband, but not all businesses realize that they can actually ease the pressure with asset-based financing.
It could offer you just the flexibility you’re looking for.
In this article, we’ll look at what asset-based financing is and how it can help your business. Put down the turkey, loosen your belt, and find out what you need to know below!
What is Asset-Based Lending?
If your business owns real estate, equipment or a stack of inventory, you can use those tangible assets as collateral to get a loan or line of credit.
Or if you’re a service-based company with outstanding invoices, you can borrow against your accounts receivable. The size of the loan will be relative to the amount owing in outstanding invoices.
Some asset-based financing companies offer this loan as a line of credit. That means that you only use as much credit as you need, and, if you need it, your available balance increases with each payment.
This is different from invoice factoring where a company might buy invoices from you for a specific amount, then collect payments from customers themselves.
How Can Asset-Based Financing Help Me?
One of the great things about asset-based financing is that there are usually very few restrictions on what you can use the money for. Traditional business loans are usually tied to a specific purpose, which you have to get the lender’s approval of.
Asset-based financing companies rarely place restrictions on what you use the ABL lending for since there is less risk involved for them.
There are many reasons that a business might need to increase its working capital. Maybe one of these rings true for you?
1. Cashflow Shortage
Many companies experience seasonal or industrial changes in sales which reduce cash flow temporarily. This can leave you struggling to pay for needed raw materials or inventory to fulfill orders, possibly even payroll difficulties.
Or your cash conversion cycle may be slower than your rate of payments to suppliers, leaving you in a pinch. In both cases, an asset-based line of credit can ease this pressure.
2. Growing Pains
As your business grows, there are often opportunities to expand to enable you to reach the next level but many require an investment. Perhaps you have the chance to move to larger premises, open a new location, or invest in updated equipment.
Maybe you want to invest in some type of consultancy to scale your business growth or offer staff extra professional development opportunities. An asset-based loan could enable you to do all of these and more easily than a traditional business loan.
Start-up businesses can find it difficult to get traditional loans because of their lack of track record, but if they have assets then an ABL loan could be ideal. If your business is growing but not yet profitable, this could be a way to bridge the gap.
3. Making Acquisitions
Buying another business can be a great way to grow your business, create synergies, and expand your reach. Often, these are great opportunities that only come along very occasionally so you want to be able to act quickly.
This is where asset-based lending can be a huge help. Because it’s based on assets that you already have, the approval process is generally far simpler and quicker than for other lines of credit.
That’s good news for you because you can seize the opportunity to grow through acquisition and act quickly.
Asset-based loans can also help you to refinance an existing loan. So if you need more flexibility with repayments or need a longer time to pay, ABL could be a good option.
But What If My Credit Score Is Low?
A low credit score is a common concern. Having a chequered financial history is not unusual for entrepreneurs as they try to get their ideas off the ground. Your net worth might take a while to grow, but it’s not such an issue when it comes to this type of loan.
Because these types of loans are based on your business assets, lenders are not so interested in your personal financial history. They want to know that you own the asset and what the asset is worth, but your own finances are of less concern. They use those assets as the collateral in the unlikely event that you default on the loan.
With traditional loans, lenders will examine your business and personal financial history in depth. However, with an asset-based loan, the company is more focused on the security a valuable piece of collateral provides.
That said, you will probably need to prepare a summary of your accounts receivable that includes due dates and client payment history if you’re borrowing against those. Or in the case of a physical asset, you’ll need proof of ownership.
How Much Can I Borrow?
Asset-based financing companies base this on the value of the asset and also the liquidity of it. If it is a relatively liquid asset that converts to cash quickly, such as accounts receivables, then you can probably borrow up to 75-80% of the value.
If it’s a less liquid asset such as inventory or equipment, then the way lending works, you can likely borrow up to 50% of the value.
What Are Other Benefits of Asset-Based Financing?
As well as the financial history aspect, another advantage is that there is less personal risk for you.
A lot of people assume that if they created a Limited Liability Company (LLC) then their personal assets are protected. In fact, when you take a small business loan you can still be held personally liable for that loan.
A personal guarantee is not usually required for an asset-based loan, because the asset is the collateral.
Interested in Finding Out More?
If you think asset-based financing might be a good fit for your needs right now, we’d love to connect with you. Apply online for our accounts receivable line of credit, or check out our range of business loan options.
Unlike many lenders, we let you borrow against outstanding invoices while you keep ownership of them. We just help you to access the cash that’s tied up in unpaid invoices so you can keep growing your business.