Asset-based lending provides you with the money you need for your company, using assets such as your inventory and your accounts receivable as collateral. The money you receive depends on the value of these assets. Ordinarily, you can get 80% of the value of your accounts receivable and about 50% of your finished inventory.
As a manufacturer, this type of financing may be suitable for your needs. You probably need to invest in research, new manufacturing tools, and materials to make your finished products.
All these can use up your cash reserves very quickly and you end up running out of money to continue your operations. With asset-based lending, you get the money you need immediately instead of having them tied up in your inventory and accounts receivable.
There are many benefits to this type of financing:
- You improve your current cash flow. This is perhaps the most important benefit of asset-based lending. As a manufacturer, you know for a fact that there may be a long period of time between capital outlay and receiving payment for your goods. And within this period, you may run out of money to pay for operational expenses, including meeting payroll and paying utility bills.
- It offers you the chance to grow. It’s hard to take on new orders when you don’t have the cash to spend on buying the supplies you need. But with the additional infusion of cash, you now have the money needed to buy supplies to fulfill new orders from your customers. Your ability to fulfill these new orders gives you a better chance of getting even more business in the future.
On the other hand, if you start walking away from orders because you don’t have the necessary capital it may stain your reputation, and your customers may turn to your competitors instead.
- The additional funding enables you to negotiate for better prices when you buy supplies. You can now negotiate for better terms and discounts because you can pay for these supplies early. In addition, you can take advantage any deals that may come your way. When prices of raw materials fluctuate, you can buy larger quantities when prices are low.
- Asset-based lending often offers flexible payment terms. Most loans require you to pay fixed amounts every month. But these asset-based loans may allow you to pay based on market or seasonal fluctuations.
These fluctuations are common in the manufacturing industry, but you still have year-round expenses, such as plant operation expenses, technology upgrades, payroll, and marketing. These loans cover such expenses while enabling you to pay based on the revenue you receive every month. For example, the lender may ask for 20% of your gross income every month, and that means regardless of how much business you make each month you can still make payment each time.
As a manufacturer, you’ll need a lot of cash reserves to run your business and boost its growth. If you can’t get a traditional bank loan, asset-based lending can offer you what your company needs.