web statswebsite tracking software How Asset Based Lenders are Replacing Banks

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£100,000

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Obtaining short term or long term financing for a business used to revolve around the ability of owners to convince bankers that they were worth the risk. When owners were successful, they could lock in a business loan that would help with expansion costs or tide the company over during a slow season. Along with business loans, obtaining a line of credit from a bank or similar institution also became a viable way to secure funds on an as needed basis.

The fact is that while these more traditional methods are still around, company owners don’t have to rely strictly on banks for financing any longer. A newer approach, known as asset based lending, is offering business owners the ability to obtain funds when needed based on the assets held by the company. In many cases, the cost to the debtor is less than with traditional loans and lines of credit. Best of all, many of these approaches don’t create additional debt obligations that have to be worked into the monthly operation budget.

How Does Asset Based Lending Work?

The underlying strategy behind this type of lending strategy is that the debtor will pledge some type of asset to a lender in exchange for receiving some sort of advance funding. The money used to retire the debt is connected specifically with that asset. Essentially, the lender is buying the asset and expects for the proceeds from the sale of that asset to cover the amount that is advanced to the debtor. While the specifics of the arrangement between the two parties will vary, the general idea is that funds generated by the asset go directly to the lender and are used to settle the balance of the debtor’s account.

There are several different type of assets that may be used with this type of lending arrangement. Asset based lenders sometime focus on a single form of asset while others may provide funding that is backed by more than one kind of asset. With any of these arrangements, the overall cost to the debtor is usually very competitive with the costs of going with a more traditional method of financing

Using Inventory as Security

If your company produces or sells some type of tangible goods, it is possible to use the inventory as security for an advance. With this arrangement, the lender will assess the cost of those finished goods and advance funds based on that amount. This allows your business to retain physical possession of the inventory and actively seek to sell the goods to consumers. As the items in the inventory are sold, the proceeds go to pay off the amount of the advance. Since you are likely selling each unit for more than the assessed value, this means you still make some profit each time a sale is completed.

Using inventory for this type of financing will vary, based on the nature of your business and the type of inventory involved. If your company actually produces the finished goods, then a strategy called field warehousing is sometimes used. With this approach to asset based lending, the lender secures a warehouse that is used to store the finished goods until they are sold to buyers. As sales on the inventory are completed, the amount of each sale is deducted from the amount of the advance funding. Once the advance is completely repaid, all remaining proceeds from sales of the finished goods count as pure profit and are forwarded to the producer.

If you operate a retail establishment, you can use your inventory to obtain advance funding, based on the anticipated sales of the merchandise. In this scenario, you continue to display the items for sale in your store. As the sales are completed, the proceeds are routed to the lender. After the total amount of the advance is repaid, the rest of your sales are retained as net profit. Typically, this approach is known as floor planning.

With both of these approaches to using inventory as security, lenders are taking on very little risk. This means that the fees assessed for offering the lending will be very competitive with both secured and unsecured loans from banks.

Invoice Discounting Rates Starting at 1.59% to 3.5%

  • No monthly requirements.
  • No financials needed.
  • No setup fees

Another approach you can consider is to work with a lender who offers factoring services. Asset based lenders of this type will purchase a batch of invoices connected with your most recently closed billing period. The purchase price is set at the face value of those invoices. As part of the arrangement, the lender will provide an advance that is usually eighty percent or more of that face value. Payments from your customers are sent directly to the lender, using an address that is supplied by the factoring company. Once the amount of the advance is settled in full, the factoring company retains a small percentage of the total face value as a service fee. All remaining funds received from your customers are then released to you.

This type of arrangement can work very well in many instances. The factoring process allows your company to make use of the receivables immediately, rather than having to wait for customers to send in payments. You can use the funds for any purpose desired, including paying your obligations to various creditors and meeting payrolls. In most cases, the small percentage that the factoring partner retains as a service fee is lower than what you would pay in interest on a business loan or a line of credit

Factoring also provides you with an ongoing means of using your receivables to generate cash over the long term. While there are provisions for ending the relationship, many company owners find that this approach works very well and will continue to submit invoice batches for factoring on a continual basis. This is especially true if the arrangement makes it possible to avoid incurring late fees and penalties by paying recurring obligations on or before their due dates.

Using Balance Sheet Assets as Security

There are also lenders who will provide funding in exchange for pledges of certain balance sheet assets. This can include any type of asset that the lender considers to be of similar value and is willing to accept in return for providing the loan. Typically, the asset must be completely unencumbered in order to be considered acceptable as security for the lending arrangement. Assets such as vehicles, cash in bank accounts, or even supplies may be considered for this purpose. Depending on the amount of prepaid expenses that are current reflected on the balance sheet, it might be possible to use those as security for a short-term loan.

Conclusion

Today, business owners have a number of options when it comes to obtaining short term or long term financing. Rather than assuming a bank is the only way to get the necessary funding, it pays to talk with several different asset based lenders. Since the process makes excellent use of some asset your business already owns, these lending approaches are actually much easier to manage than the more traditional lending solutions. In addition, there is a good chance you will find the terms of the arrangement are in the best interests of your business and will provide the level of funding that is needed to move the company forward.

Invoice Discounting Rates Starting at 1.59% to 3.5%

  • No monthly requirements.
  • No financials needed.
  • No setup fees