Asset Based Lending Could Be Your Best Financing Option
Every business will have a financing need at some point. It might be a seasonal decline in sales that puts your cash flow at risk. Maybe you’re going through growth and need additional funding. Looking at your financing options can be overwhelming but understanding some of your choices can help you make better decisions.
What Is Asset Based Lending?
Asset based lending is lending that you receive based on assets. Accounts receivable financing, or factoring, is one popular type of funding, but it also includes purchase order financing or equipment lease-back. You might choose to sell a portion of your invoices to a third-party lender who gives you an advance on what your clients will pay you. Equipment leaseback programs let you sell your equipment to a third-party, who then allows you to lease the item. Once you pay the lease back, the equipment is yours again.
Why Choose Asset Based Lending?
One key benefit to asset based lending is that the financing typically isn’t a loan. You’re using the value of what you own as a collateral for an advance of capital. Even if your business doesn’t have a history of credit or longevity, you can often more easily qualify for asset based lending. Your business isn’t taking on more debt, and the process is generally quick.
With accounts receivable financing and purchase order financing, the lender is more concerned with your customer’s credit score rather than your business’ score. This can make qualifying for asset based lending more accessible to many people who don’t qualify for a traditional loan.
Concerns With Asset Based Lending
Factoring gets a bad name because many loan sharks took advantage of small fashion design companies in the past. When you work with a reputable lender, this shouldn’t be a problem. However, the fees associated with asset based lending can be more than a traditional loan. You may want to negotiate with your lender for better terms. If your customers usually pay on time, you can use this to lower your fees.
While you don’t have to factor all your invoices, your lender may require you to invoice a certain amount each month. Always check the terms and conditions of your contract and understand all the details to make sure asset based funding will work for you.
The accessibility of this type of financing can outweigh the cost factors. Having access to quick cash to get you through a slow cash flow might be just what your business needs.
