This article is mainly about Asset Based Lending, what it is, how it works, and how it can help your business.
Although the factoring of invoices can provide the immediate injection of cash that your company needs, there may be times when selling them at a discount is not cost effective.
For example, if you happen to be in a very competitive industry, then your profit margin may be too low to use this method. And so while the non-payment of your invoices would cause a hardship, so would settling for less than their full value.
In this situation, you may find that a loan is the best option for you.
Normally, when we think of loans, we do so with respect to purchasing something.
Let’s say that you need to replace some equipment. In that case, you might need to borrow enough money to buy it.
But let’s say that instead, you need some extra cash in order to meet a scheduled expense, such as the company’s payroll. In that instance, there would be no new asset to use as collateral.
In such circumstances, asset-based lending comes into its own because you can use some of the assets that you already have as security for that loan. It’s similar to borrowing against the equity in your home.
The repayment of that loan is made through your cash flow.
There are a couple of different types of assets that can be used for loans of this type.
One is your inventory. Now there’s nothing to say that all over your resources need to be used. You only need to enough to cover the size of the loan. And so you needn’t feel as though you’re losing control of your company.
Remember that this is a short-term fix.
Another asset that you could use is publicly-traded stock. Larger companies do this on a regular basis.
There are however, two situations that can have an impact on the ability of the company to use this option.
The first is the market price of the stock. When it’s high, more money can be borrowed than when it’s low.
The second is the interest rates, and sometimes the two are related. Higher rates mean that the loan costs more. But, the markets usually react when rate go up because it reduces the amount of money that’s available to buy stocks from all companies, not just yours.
And so, if you depend on the market price of your stock for your asset based loans, then you may not be able to borrow as much as you need.
There’s a second reason why you might want to obtain an asset based loan, and that is so that you can take advantage of an unusually large order. It could be that you simply lack the resources to obtain the materials that you would need to fill your customer’s request.
The last reason why an asset based loan might come in handy is if there is a delay in the payment of one or more of your larger invoices. Where margins are tight, you could find that a shortage of cash would impede the firm’s ability to trade at all.