How to Increase Cash Flow with Asset-Based Lending
Seasonal sales trends and growth phases are two reasons why your business may be experiencing a cash flow shortage. If your company has a regular business cycle or a research-backed growth projection and owns substantial assets free of any creditor’s claims, asset-based lending might be the best solution to beef up your working capital.
The Basics of Asset-Based Loans
Asset-based loans (or ABLs) are short-term loans that usually average a year, but could range from six months to two years. ABLs are most often revolving lines of credit secured by your business’s assets, preferably those tangible and with high market value.
The most common types of securing assets are:
Inventory and raw materials
Equipment and machinery
The value of your collateral directly influences your credit limit and could be seized and liquidated into cash if you default.
Asset-Based Lending vs. Other Financing Options
Leveraging your company’s property can seem risky, but it also lowers your risk potential and enables you to qualify more quickly, often at better interest rates than factoring. Since the basis of your loan is centered mainly around the market value of your assets, your financial history and personal credit rating are less critical for the approval.
Revolving lines of credit might be one of the most flexible financing products available since you only need to withdraw the cash you need when you need it. An ABL only charges interest only on the funds you pull out, unlike term loans that charge interest on the full loan amount, whether you use the money or not.
It is essential to consider your ability to manage an asset-based loan carefully because you are putting valuable goods on the line. However, an ABL seldom requires a personal guarantee or your private property as collateral.
Eligible Candidates for an Asset-Based Loan
While some lenders require strong credit history, other companies are less concerned with your business’s rating so long as you have a property with a high cash value. Before you apply for an ABL, make sure your assets are “free and clear”: lenders will almost certainly run a Uniform Commercial Code-1 search to check for liens filed against your company.
Asset-based lenders usually want evidence that they are making a sound investment in a business with a solid corporate structure and a viable business model. Lenders generally want to see accurate, comprehensive financial reporting, defined internal processes, and fraud controls.
If your company has a solid operating structure and a confident growth strategy, coupled with a strong asset portfolio, you could boost your cash flow and make that growth happen with asset-based lending.