Having a steady, predictable cash flow is extremely important for a business. A scarcity of cash on hand can sink companies or put them in a hole that sets them back. Asset-based lending is beneficial for commercial equipment dealers as they attempt to expand their business and improve their balance sheets. Asset-based financing involves putting some of the company's assets up for collateral to secure a loan or business line of credit to increase its cash supply.
Asset-based lending is often the perfect solution for small and medium-sized businesses that need help obtaining financing through other means. It can be utilized to get money flowing into the company quickly. By putting assets such as accounts receivable, equipment, inventory, real estate, and other balance-sheet items up as leverage, the business may receive a loan that can be used for immediate needs – in a faster time frame than other types of loans.
Securing this type of loan offers some potential disadvantages, but by working with Finloc, it's possible to select the correct type of financing that fits your company's needs. This article will describe the type of asset-based financing available and the pros and cons of going this route.
Commercial equipment dealers are often a good fit for asset-based lending because of the high levels of owned inventory they can put up as collateral. For those with high levels of debt struggling to obtain a bank loan, leveraging the business's assets is a way to ensure you have enough cash. Equipment doesn't need to be sold, as the companies borrow against those assets. And the more your materials are worth, the more money you can receive in the loan, as the lender loans funds based on a percentage of the value of the collateral.
Instead of the traditional way of securing a loan or line of credit, which is often slow and drawn out, asset-based lending may get money to you quickly. Like other loans, you will have to pay off the principal payments as well as interest throughout the life of the loan. Here are some of the many types of asset-based financing available for businesses:
Commercial equipment dealers often use this financing to acquire additional new or used equipment. They can secure this asset-based loan by using the acquired equipment as collateral or other previous-owned assets. This method of financing often has a more extended repayment period because of the higher cost of buying equipment compared to other assets.
Lease lines of credit are most needed if you are looking for more than one lease in the future and anticipate the need for multiple leases. Just like a credit card or business line of credit, you receive a credit cap for a short time. During this time, you work with companies to lease various equipment as long as you stay under the credit limit.
Also known as wholesale finance or inventory financing, floor plan financing is a rental agreement between the business and a vendor. This lease is typically used to rent equipment from a vendor for a specified period. Companies can save money by getting access to equipment without buying it. The leases are usually flexible and can fit a specific business need.
FMV leases allow the lendee to utilize the equipment for a certain number of months until a decision is needed on whether to continue to lease, buy the asset, or return it to the lender and go in another direction. The business can purchase the item for a fair-market price at that time. The asset is not part of the balance sheet of the company.
This can be like a rental agreement, where the lessee pays to use the asset but doesn't own it or get any of the economic benefits out of owning it but is still responsible for upkeep and repairs. At the end of the term, the company may have an obligation to purchase the equipment at the estimated fair value price. Unlike an FMV lease, this type of asset-based lending usually involves large payments, and the asset is considered part of the company's balance sheet.
In this type of agreement, the business sells the asset and then leases it back from the buyer. This allows the business to free up capital and retain access to the asset without owning it. The company receives cash from the sale while still using the asset as it could before.
This can be a complex form of asset-based lending and is used for loans that traditional lenders typically do not offer. It offers solutions for those not satisfied with the structure of conventional loans and is tailored to meet the company's specific needs. Multiple complex leases may be combined into one package for the lendee to pay off. This lending is often used to finance projects that require significant upfront costs.
Money due to the company from customers may also be used as collateral for obtaining an asset-based loan. This type of financing allows a company to receive the amount that is due to them in the future right away instead of having to wait for all customers to pay off their outstanding bills. You may be eligible to borrow over 75-85% of your accounts receivable, compared to only 50-60% for the value of your equipment.
This is a short-term line of credit used so businesses can buy inventory as needed, which is often required to help smooth out seasonal fluctuations. The loan is to purchase inventory, such as raw materials. This financing method may benefit companies looking to receive volume-based discounts for large orders.
How do you know if asset-backed lending is for you? It's best to determine the pros and cons before making this pivotal decision. Here are some of the most significant advantages of putting your assets up for collateral:
Asset-based lending isn't the perfect solution for all businesses. They need to weigh the potential pros against some of the disadvantages that may arise:
Like any loan, you'll need to show the lender that you're not at a considerable risk of missing payments. The fact that your assets can be taken lowers some of the risks for the lenders, but they are still looking for the right people to do business with. Although asset-based financing can be faster than conventional ways, there are requirements you'll need to show the lender to prove you aren't a risk of defaulting. Here's some information that will help determine if you qualify:
Growing businesses often need an influx of cash. The need may develop from the desire to hire more employees, pay off debts while facing a cash crunch, or even take advantage of an opportunity that is too good to pass up. In these circumstances, asset-based lending may be the appropriate decision to make. Like all loans, asset-backed financing comes with advantages and disadvantages. Still, if a company has resources to leverage as collateral, it can be a fast option to get cash quickly and help smooth out a bumpy ride when a traditional loan won't do.
For over 45 years, Finloc has been helping companies grow and make ends meet. Navigating through the loan process can be complicated, and choosing the incorrect company to do business with can doom your odds of receiving a loan that allows your business to tackle its needs and prosper. Finloc works with you to secure the right type of asset-based financing for you and will guide you through the process of using your coveted assets to obtain a loan. Visit Finloc to find out how their experts can help you get started on this crucial process.