Asset-based lending, a financial service that we specialize in here at The Commercial Finance Group, depends on using assets, such as inventory and accounts receivable, as collateral to receive funding. In other words, asset-based lending concerns when a company takes a loan against the collateral value of its hard assets. With office locations in Burbank, Los Angeles and Atlanta, The Commercial Finance Group can provide you with high-quality asset-based lending services that are sure to impact your business in a positive way.
As a business owner who probably seeks growth and a streamlined cash flow management process, you might be curious as to how asset-based lending can help your business. After all, it’s one of our main financial services at The Commercial Finance Group. So why should you care about asset-based lending? Read to find out how your business can grow.
Increase Your Capital Strength
As we’re sure you’re very familiar with as a business owner, companies need capital to grow and operate their businesses on an efficient and cost-effective basis. Often, new sales create the need for greater liquidity. Inherent to business expansion is also the requirement of upfront capital and the ability to support higher expense levels.
With an asset-based line of credit, you can provide funding for both of these scenarios. Additionally, an asset-based line of credit can also help a company more efficiently manage the peaks and valley of its cash flow. If your business simply needs that extra push forward with an infusion of cash to get over a financial hump in the road, then an asset-based loan is most likely a good idea.
Asset-based loans are also especially suited for manufacturers, distributors, and service companies who have a leveraged balance sheet whose seasonal needs and industry cycles often hamper their cash flow. Asset-based loans can also be used to finance acquisitions, which will help fuel your business growth.
How Much Capital to Expect
Your company’s borrowing capacity will affect the amount of business capital that can be obtained from an asset-based lender like The Commercial Finance Group. Borrowing capacity refers to the amount of money a business can borrow based on its current financial state. Typically, companies can borrow about 10 to 15 percent of their total annual revenue.
For instance, if your business generates $1.5 million annually, then you may be able to get around $150,000 to $225,000 in financing from an asset-based lending company. Keep in mind, however, that certain asset-based lenders have minimum borrowing amounts, meaning that they will not lend less than a certain amount of money to a business.
Rapid Growth Assistance
Ask yourself: Is my business experiencing rapid growth? Are orders coming in faster than my business can process them? If you are in fact experience rapid growth with your business, then getting in contact with an asset-lending company is something that you should, at the very least, seriously consider.
Why? Because fast-growing businesses tend to burn through cash extremely quickly and are left with insufficient working capital to support their growth. If it’s a matter of a lack of money, then you might be thinking that applying for a traditional loan from a bank would also work. While this is technically true, it’s a very inefficient solution to your cash flow issues. Applying for a traditional loan could take multiple months to fully process, or the credit line could be restricted to a ratio of the existing capital base.
Realistically, either of these options could technically stunt a company’s growth and put a strain on its customer and vendor relationships. Businesses need to be able to fill customer orders as quickly and efficiently as possible, or they’ll risk losing out to their competitors. An asset-based lending arrangement could help solve this tricky financial challenge by providing much faster access to capital as compared to a traditional loan through a bank.
Inventory Maintenance
Maintaining inventory can be very capital-intensive, which, if you’re short on capital, can be a very pressing issue for your business. Inventory maintenance can be especially capital-intensive if products aren’t moving fast enough. Many manufacturers, distributors, and wholesalers require a sufficient supply of inventory in order to properly and efficiently fill orders.
Wholesale, distribution and manufacturing businesses need to pay their suppliers and cover overhead costs even when revenue isn’t coming in, which is, again, where an asset-based lending company like The Commercial Finance Group comes in to help. An asset-based lending company can help solve both your inventory subsequent cash flow issues by providing you with the necessary financing to continue your operations at your desired pace and capacity.
Be Mindful of Receivable Quality
Your chances of securing a credit line are really only as good as the quality of your receivables to begin with. Commercial lenders will sort through your customers as an auditing function to identify the ones that pay in less than 60 days or have a considerably strong credit rating. Sometimes, sales to individuals or small businesses may not qualify as ‘eligible receivables,’ so keep that in mind, especially if your sales tend to be more low-volume.
More Cost, More Payoff
It is true that asset-based loans cost more than traditional loans, but it’s almost always worth it if your business is expanding so fast that it’s eating through its own capital. It’s hard to generalize interest rates because they vary so much, but additional costs other than interest rates can also include an additional ‘audit’ and due diligence fees that come with the overall cost of an asset-based loan. Larger financial companies might also require your personal guarantee on an asset-based loan in addition to the assumption that you have other banking relationships.
In most cases, asset-based lenders will require that your customers send their payments directly to their financing company, instead of to you as the business owner. As a result, a third party gains control of your company’s cash flow, but don’t let that scare you – trust is a necessary part of outsourcing business matters. Rather, think of it as one less thing to worry about so you can focus on more pressing matters at hand.
It seems strange that rapid and explosive growth can actually hold your business back if you don’t have the necessary capital to account for this growth. Isn’t growth a good thing for business? Yes, but it must be responsible and progressive growth – remember, you need sufficient capital to continue your business operations! If your company is exploding with business and you’re not quite sure how to handle things on the financial side, no worries. Contact The Commercial Finance Group today to get your cash flow situation in a good position and get the asset-based loans that you need to move your business forward.
