Asset-Based Financing: When Does it Make Sense?
Once viewed as the “funding source of last resort,” in recent years asset-based financing has emerged as a viable and flexible solution that enables businesses — especially smaller and mid-sized firms — to get the working capital they need to do everything from cover unexpected costs, to support strategic growth and expansion plans. Indeed, according to statistics from the Commercial Finance Association, which is the asset-based lending trade association, the number of businesses taking advantage of asset-based financing has surged more than 30 percent in the last decade.
Below, we highlight some common scenarios when asset-based financing could make strategic sense vs. other types of business funding:
1. When Borrowers Have High-Quality Collateral
Some borrowers have high-quality collateral — such as valuable machinery, real estate, vehicles, inventory, receivables, and so on — but limited cash flow, high debt-to-capital ratio, and/or impaired credit. In these cases, asset-based financing can be both smart and feasible; especially since obtaining a conventional bank loan without sufficient cash flow or strong a credit rating is typically impossible.
2. When Quick Funding is Desired or Required
Obtaining asset-based financing usually only takes a few weeks; and in cases when collateral valuation is simple and straightforward (e.g. using receivables), it can take a matter of days. This rapid timeline is a notable advantage, because some other methods of raising cash — such as finding suitable venture capitalists — can take months or years, and business owners must give away a portion of their equity.
3. When Funding is Needed to Manage a Downturn and Lead a Turnaround
Many businesses that urgently need funding during marketplace downturns cannot turn to banks, since the first thing they look for is a strong balance sheet that demonstrates positive cash flow. In this scenario, asset-based financing can be a lifeline that enables businesses to cover immediate costs (salaries, suppliers, taxes, etc.), and make key investments and/or acquisitions that lead a successful turnaround — and a return to profitability and growth.
4. Borrowers Want to Leverage Work-in-Progress Assets
Borrowers who have work-in-progress assets — such as raw materials that will be manufactured into final products — may be able to use them as collateral for asset-based financing. If so, then costs of borrowing would be covered by sales revenue in the future.
To learn more about asset-based financing and discover if this is a strategic funding option that you should seriously consider, then contact the National Business Capital team today. Your consultation with us is free, and we are here for you 24/7/365.