Increase Cash Flow With Asset-Based Lending
Maintaining a healthy cash flow can be one of the most grueling aspects of running your business and can be crucial to your success. Running out of money and failing to pay bills is one of the main reasons a company fails. However, the amount of money coming in may not always be enough, and staying proactive during a financial downturn can help improve the overall strength of your business. When cash and credit aren’t available, some companies turn to their assets and seek financing.
Determine If Asset-Based Lending Is Appropriate
Seasonal sales slumps, unexpected costs, and mounting expenses could easily tip a company into negative cash flow. In this situation, asset-based lending might be an appropriate solution. These short-term financing options offer companies cash, using assets like inventory or accounts receivable as collateral. These loans can be especially beneficial for businesses that have suffered in the recent economic downturn. Borrowing against assets is often easier than acquiring traditional loans that put significant weight on good credit history.
Using Assets to Secure Cash
If you have determined that asset-based lending is a viable solution, it’s essential to understand the different options so that you can decide which best meets your business’s needs.
- Asset-Based Loans – A company can secure this type of financing with inventory, owned equipment or outstanding accounts receivable. The amount of the loan usually depends on the age and value of your stock or equipment. New, valuable machinery is probably excellent collateral; obsolete inventory may be considered more of a liability. The age of your accounts receivable is also a significant factor. A large number of outstanding receivables that might never be collected are probably not worth much to a lender.
- Invoice Factoring – Another method to gain a cash boost is by selling your outstanding accounts receivables to a third party, which will then assume responsibility for collection. They will pay a significant percentage of your total AR at the point of sale, deduct service fees and will usually forward the net balance of the paid invoice. A newer company with high sales numbers and customers who pay promptly might find this option suitable if it doesn’t own much of value.
Consistent, monthly monitoring can help you identify trends in your cash flow and thus anticipate periods when you may struggle with expenditures. Asset-based lending can be an ideal option for not only your company’s short-term financial survival but for your long-term peace of mind as well.
