Funding with Asset-Based Financing

Asset-backed financing is available from a variety of financial service organizations. When it comes to enterprises in desperate need of financing due to the quick growth of their operations, they’re in high demand. These funds are used by businesses to support future expansions in order to boost income. The distinction between asset-based financing and other types of financing is also important for business owners to understand. Inventory or equipment line of credit, which is a credit line secured by inventory or equipment assets, and factoring, which is the purchase of future receivables rather than current assets, are two terms that are sometimes used interchangeably. Assets are used in asset-based finance typically liquid cash but can be products as well.

This sort of finance is commonly used to fill cash flow and payroll gaps, but it can also be used for refinancing current debts, growth, mergers, acquisitions, and buy-outs, as well as investing in equipment or inventory.

Requests for asset-based finance are also a result of rapid expansion and the resulting cash flow challenges. If a new but growing company appears to be a risk on paper due to a short time in business or an irregular balance sheet, it will be easier for them to get approved for anything secured by an asset or other collateral.

Physical assets such as equipment and inventories are preferred by asset-based lenders over highly liquid collateral such as marketable securities. If the firm seeking the loan does not have enough cash flow or cash assets to cover the loan, the lender may offer to grant the loan based on the physical assets of the company. A new medical practice, for example, may be able to get an asset loan just by pledging its equipment as security. Asset-based lenders are generally used by small and medium-sized firms that need to fulfill short-term cash flow needs on a regular basis. This can help a larger company achieve economies of scale and cut overall costs.

Because invoices and future receivables are used, asset-based loans are frequently confused with factoring. Although the products are distinct, they both provide similar benefits. There is no loan or borrowing of money in a factoring transaction. To enhance its current cash flow, the cash-strapped corporation sells its future receivables. This is akin to an invoice-backed line of credit, which provides funding in exchange for the expectation of future revenue.

Funders can deal with small businesses who have bad credit or limited cash flow via asset loans and factoring. Factoring also rarely employs collateral, which can be beneficial to enterprises with limited assets, cash, or equipment.

How is asset lending different from a line of credit?

Because they are a sort of asset lending in which an asset is used as collateral, equipment lines of credit and inventory lines of credit are frequently used interchangeably with asset lending. However, not all asset lending is a specific type of line of credit. A company’s assets can also be used to secure a set-payment loan.

What if I don’t have cash assets?

Yes, lenders prefer highly liquid collateral, such as market securities and invoices, because they can be promptly converted to cash if the borrower misses on payments. Physical asset loans are riskier since the item used as collateral may take longer to obtain and sell, resulting in a total loan or funding amount that is significantly less than the assets’ book value. Borrowers with cash assets should expect roughly 70-85 percent of their assets to be utilized as funding. With less liquid assets like real estate or equipment, the company may only be able to get half of the funding it needs.

If you don’t already have any cash assets, this is a good moment to start. Because it takes idle liquid cash and pays returns on it, market securities are a popular investment choice for corporations. You can invest a portion of your cash in short-term liquid securities instead of keeping it in a savings account that pays little or no return.

If your company is unable to receive asset funding, another program that can help with cash flow may be a better alternative.

Got some questions?

Asset based financing is providing lenders with personal assets as collateral to receive working capital for your business. Assets can range from real estate to machinery. 

It’s a form of financing used to cover any gaps in a business where cash flow is needed. It’s a good source of short-term loan use.

When you apply for an asset based loan, you and the provider will work out terms and conditions that will set up how much the loan will be. From there, the provider will purchase the equipment needed for your business and take over the assets on a lease.

Over your term agreement, your business will make regular payments to what is owed. Once you’ve paid off in full, the provider will offer you your asset back under lease at the nominal value.

When it come to asset based financing, there are a few options: 

  • Asset Refinance 
  • Equipment Lease
  • Financial Lease
  • Operating Lease

Only you can determine if asset based financing is the best solution for your business.It’s good if you’re looking to use it for account receivables, inventory or property. 

Be mindful that this involves putting your personal assets up as collateral for leasing. Make sure you’re comfortable with others having temporary access to your assets.

There are the few grand perks of asset based financing. They include financial stability, flexible restriction terms, and lack of debt.

Asset based loans do generally cost more than traditional bank loans which is a downside. It is ultimately your decisions on how you weigh the pros to the cons in order to make your final decision.

Having a healthy business means that it’s running well and you’re staying on top of all the business priorities. Lenders take notice in things like this when reviewing your application. 

Credit score isn’t everything in this case. We won’t automatically deny you because it’s lower than average. 

A helpful tip: if you have more than one asset for collateral, use the one you feel is most valuable in long-term profit for your financing. 

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