There are many ways of raising the capital needed to grow a business, yet many companies default to a traditional cash flow-based loan. Asset-based lending is a lesser-known financing option that may make more sense. The following outlines what asset-based lending is, some key advantages and who could benefit from it.
What Is Asset-Based Lending?
Asset-based lending is a financing solution that allows an organization to borrow money for growth, payroll and other operating expenses based on their underlying assets. In other words, it can provide access to additional capital secured by the company’s accounts receivable and inventory, as opposed to traditional cash flow or historical profitability.
Suppose a manufacturer wants to increase their capacity by opening an additional facility but does not have the adequate capital. The company is seeking financing options to borrow the necessary funds to produce more inventory and acquire more equipment.
The manufacturer hopes to continue expanding its client base and improving its margins. Knowing this, they decide to approach lenders about an asset-based loan instead of a traditional cash flow loan.
Advantages of Asset-Based Lending
Asset-based lending provides significant advantages for companies that are “asset-rich,” as well as for those undergoing a transition, due to expansion, merger, acquisition, etc.
Having ample liquidity to provide a cushion for delays in collections, supply chain disruptions or other operational troubles can be achieved by leveraging the company’s current assets. When accounts receivable and inventory are used to support a loan, their value as a true asset may be enhanced towards increasing working capital availability. A company works hard to acquire and support customers and can realize an additional benefit of their hard work by using their assets to support their credit facility.
This may be especially helpful for well established businesses or those that are still in a growth phase. The investments made in acquiring the assets needed can pay off two-fold: they enable the companies to support its throughput, and they can be used as the foundation of an asset-based loan.
Who Could Benefit from an Asset-Based Loan?
While companies with considerable assets can take advantage of asset-based financing, those without a lot of fixed assets, but with considerable accounts receivable or inventory, may also benefit.
Companies That Offer Credit Terms
Accounts receivable, while not money in hand, are a powerful asset that can be used to create an asset-based lending solution.
For example, a distributor has several clients that are in the process of making large payments on outstanding invoices. They also want to expand their product lines and carry additional inventory to reach new customers.
The distributor’s cash flow may not be enough for a lender to give them the funds in the desired terms, but they can use their accounts receivable assets to support an asset-based loan on competitive terms.
Organizations Looking to Acquire Another Company
If a company is seeking additional credit availability to support an acquisition, it can utilize the target company’s assets to complete the necessary financing for the acquisition.
For instance, a software company is trying to purchase a competitor. They know that their software, when combined with the target company’s, will be complementary and further strengthen their market position. However, the acquisition will require more capital than what is available with their cash flow and reserves.
The acquirer (in this case, the software company) can use a combination of both their and the target’s cash flow and accounts receivable to establish an asset-based loan for the acquisition.
Since asset-based lending relies on asset quality, it can be particularly beneficial for a business looking to fund its working capital needs — pursuing growth opportunities, smoothing seasonal cash flow fluctuations or financing acquisitions. Whatever the reason, asset-based loans can often be a more flexible and competitively priced financing option for companies with a quality asset base.
Alliance Bank of Arizona's Capital Finance Group is committed to the success of its clients in both good and challenging times, helping them use their assets to their full potential. We help clients maximize their borrowing capacity to deliver the liquidity they need for both operations and growth with our asset-based lending.
To learn more about how an asset-based financial solution can empower your business, contact our Capital Finance Group today.