Are you a manufacturer in need of working capital?
Call us at 1-888-382-3766
Asset based lending is a popular way for businesses to get the funding they need. Manufacturing asset based lending is common, and it represents a viable source of funding when banks are unable to offer an unsecured loan or line of credit.
Asset based lending is now a $200 billion market. Manufacturing asset based lending leads the pack, as it accounts for 31% of this market. Wholesalers follow at 28%, and then the retailers come next at 21%. This form of financing is not reserved for large companies either, as 71% of these companies have annual revenue of less than $50 million.
Two Types of Asset Based Lending
In general, asset based lending falls into two different types:
- Term loans. This is when you get the money you need, and then you have to pay on schedule. The amount is fixed for a specified period of time. Once you start paying on a term loan, the amounts you pay can’t be borrowed again. Usually, you secure a term loan with fixed assets such as your equipment or property. You then use the funds to finance your long-term needs and to acquire additional equipment.
- Revolving credit. With this type of finance, the amount you owe can fluctuate even on a daily basis. You can borrow money up to a specified amount, start to repay the money, and then borrow again as the need arises. Generally, you secure a revolving line of credit with your current assets. These are usually your inventory and your accounts receivable. Most of the time, the money will be used for funding working capital needs.
Explaining the Revolving Credit Model
This revolving credit is often an excellent way to maximize the availability of your working capital. While term loans are familiar to many, revolving credit may need to be explained.
But it’s actually simple. You offer your receivable and/or your inventory as collateral for the line of credit. Your credit limit will be determined by the value of the collateral. Once your receivables are paid, the cash is then forwarded to the lender as payment for the outstanding debt so that the balance is reduced. If you need more money, you just ask and you’ll get what you ask for as long as you don’t go over the credit limit. It’s like using a credit card.
The lender is in charge of the revolving line of credit, and also manages the collateral. This is to ensure that you get the optimum amount of credit anytime you need it. Your customers are not generally informed of this arrangement, so you continue to service your receivables and collect the payments. Your customers don’t have to know about this funding option.
Advantages of Asset Based Loans
In general, the main advantage here is that you get the additional funding you need quickly. Getting an unsecured loan is much more difficult. The revolving line of credit can provide a cushion for your working capital, and you don’t have to wait for the inventory to be sold and for the receivables to be paid in cash. With these term loans, you can then make long term plans for your company’s growth.