## Asset Based Lending Metrics that Factors Will Consider

If you are a small business owner, then it’s easy to find out which factoring company or asset-based lender offers the most attractive arrangement for you. The asset based lending metrics you need to look at includes the advance rate (the money you get right away in relation to the value of your accounts receivable), the costs and fees, and the number of days you’ll need in order to get the money you need.

But the financial institutions which provide you with the funding you need have asset based lending metrics of their own. These metrics determine how much money you get as an advance, and also affect the costs of the financing.

• Accounts Receivable Turnover Ratio. This refers to the net credit sales in a particular period of time, divided by the average accounts receivable. The net credit sales are used instead of net sales because your cash sales aren’t your accounts receivable. You get the average accounts receivable by adding the beginning and ending receivables for the year and then dividing the number by two.

When you have a high ratio, then it means you have an effective system of extending credit and collecting accounts.

• Sales Dilution Rate. Sometimes your gross sales and your net sales have different figures. You may have \$100,000 a month in gross sales, but your net sales is only \$90,000 for some reason or another (your customer returned your merchandise or they were unable to pay). So in this case, you have \$10,000 sales dilution divided by the total gross sales of \$100,000, which gives you a 10% dilution rate.

You will want to keep this rate low, as this is one of the crucial metrics looked at by lenders to determine how much money you can get in advance.

• Asset Turnover Ratio. By taking your net sales and dividing it by the value of your total assets you will know your asset turnover ratio. So if you have a .5 ratio, then that means you get 50¢ for every dollar you invest in your business. This ratio sheds light on the efficiency of your company in generating revenue from its assets.

In some variations of this ratio, the lender may want to check and see how you use your fixed assets, and how you use your working capital.

• Inventory Reliance. This is your liabilities that can’t be covered by your liquid assets, divided by your inventory. This is a ratio that shows how much of your inventory you would need to sell or convert into cash in order for you to cover your current liabilities. It’s best if you have a very low ratio here, or if you don’t have any current liabilities which you can’t cover with your liquid assets.

Keep in mind that the specific figures that factors are looking for in order to give you a good deal depends largely on the industry you’re in. Each industry has different standards. This is precisely why you will want to enter into a financing relationship with a factor who is very familiar with your industry. Such a factor knows the “norms” in your industry, so they will be able to evaluate your situation more accurately.