Asset Based Lending can come from a variety of sources. There are commercial sources which have entire divisions devoted to just asset based lending. You may find that you will want to use more than one source for your asset financing needs.
One of the most popular types of asset financing is in the form of flooring; which is lending based against the inventory you purchase. Car dealerships have used this type of financing for decades. With this particular type of asset based lending, there are two distinct types of loans. One is based strictly against each individual piece of inventory – such as automobiles, which is easily identified by the VIN (Vehicle Identification Number) that is carried by each vehicle. The dealership, for example, has so many days after the car is sold to pay the finance company. The other type of flooring is done strictly by invoice. In this scenario, the flooring company acts as a middle man for you. You place your order with your supplier and the flooring company then prepays the invoice, taking all the discounts that are available. You then have a set number of days in which to pay the full invoice price to the flooring company (or bank).
Banks also are involved in asset based lending. This type of business financing is based against assets: accounts receivables, buildings, inventory, and vehicles or other equipment. Do not expect to get 100% financing and remember that banks and financing companies are for-profit business, so you will be paying them interest.
You should shop for the most competitive interest rates and favorable terms from your asset based lending source. Make sure that the way the loans are structured is something that you can live with. Look at the worst case situation. What happens if everything goes into the waste basket? Can you live with the terms then? Never forget that your financing source will also be looking at the worst case scenario and will try to tie up as many of your assets (both business and personal) as possible.
Even when you consider the possible down-side, this is one of the best ways to finance your company’s needs. Asset based lending or asset financing is very straight forward and is easily understood. Be sure to use your accounting professional to help evaluate this added cost of doing business, as there is a cost. Many times, it is the only way to soundly grow your company without stretching your working capital beyond its bounds.
Take care with your needs and talk to the banking and flooring companies so that you have a really good idea of what their expectations of your company will be. By working your plan, you should be successful with prudent use of your working capital and the applied business practices of money management.
Jamie Doyle is an online information publisher, researcher and webmaster. His interest are varied widely, from business management and international finance to remodeling and grand children.