Nothing will stagnate a business faster than manufacturing a product that isn’t in demand. Think about smartphone technology alone. A new model comes out and people clamor to get their hands on the latest version; a year later, sellers are clamoring to get rid of that “latest” version. Asset based lending is a financial vehicle designed to help manufacturers stay ahead of their production line.
Basic Concept
Asset-based financing is taking a loan against a percentage of your company’s assets or manufactured product, but unlike traditional bank lending, the assets you use for collateral are your future accounts receivables or inventory. This takes a little bit of pressure off you, the business owner, as the lender will be looking at your customers rather than you when assessing overall financial solvency.
How Much Money
How much money you’ll receive from your asset based lending depends on what you put forth to the financier. If you are offering a percentage of your future accounts receivables, you can expect 70 to 80 percent of them in cash. If you are offering inventory up for sale, a lender will usually provide monies amounting to 50 percent of the stock on hand.
How You Receive Your Cash
In most cases, a line of credit will be issued to the borrower after the lender has determined that the assets are worthy to borrow against. Prior to offering your line of credit, your potential financer will review your customers and vendors to ensure that they pay their bills. If you are offering inventory as your collateral, the lender will look at how it sells on the market.
Your Role
You will still need to prove that you manage your business well even though you are offering up your accounts receivables or inventory to back your loan. In asset based lending, the financer also looks at your business’ financial statements and reporting systems, so make certain your books are in order prior to seeking an asset based line of credit.
How to Use the Money
If you are focusing on your manufacturing company’s growth, one of the best uses for this type of loan is to fund future production. Asset based lending works well when the next greatest thing is about to hit the manufacturing floor, because it provides you with the instant cash flow you need to manufacture the product that are you going to sell in the future, and you can’t help but grow your business if you’re the go-to company the gets the product off the line and on the shelves.