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Companies Can Turn Their Assets into Flexible Credit with Asset-Based Lending

Posted on August 15, 2018 in Asset Based Finance

Asset based lending solutions has become the go-to funding solution for managing operational expenses. This source for lending can also effectively solve cash flow difficulties. By using accounts receivable, materials and products as collateral, your company has a good chance of obtaining lines of credit and loans. Cash when you need it most helps you achieve business goals and expand your competitive edge in the marketplace. 

What Makes Asset-Based Loans Attractive? 

Asset based loans are currently a major source of funding for many companies across a wide range of industries. Fast and steady financing are the main attractions companies have for these loans. A continuous flow of cash from revolving lines of credit provide financial support and stability for day-to-day operations. 

Combined worth of assets determines how much companies can borrow. These assets vary and may include: 

• Accounts receivable 
• Inventory 
• Business equipment 
• Manufacturing machinery 
• Certain contracts with recurring revenue 
• Personal assets of business owners 

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How Asset-Based Lending Works 

A company seeks asset-based funding by applying for the loan with a commercial credit financing lender. The lender evaluates the company’s assets to determine how much money the company can receive. Typically, the approved advance is based on the type of collateral used. 

For instance, 85% in the value of accounts receivable collateral may qualify. With inventory, at least 50% could be approved. The company pays a fee to the financing company based on the borrowed amount. Most companies that seek funding may receive advances between $500,000 and $20 million. 

Once the commercial credit financing lender approves the company for funding, an is established. Both parties agree to and sign a lending agreement that includes a loan repayment schedule. The lender issues the advance amount agreed upon on weekly, monthly or quarterly scheduled lending dates, as agreed. 

The company repays the ongoing cash advances according to the scheduled repayment dates. Once a good loan repayment record is established, the line of credit might be increased, if needed.

Reasons for Borrowing

Companies may need loans for a variety of purposes. Aside from normal operational expenses, amounts borrowed might go towards business restructuring and turnarounds. These advances can also be applied to the costs of company buyouts. Especially during times of economic growth, this type of revolving loan can be vital to facilitating mergers and acquisitions. 

Other reasons for borrowing might include: 

• Purchasing new inventory 
• Restocking current inventory 
• Meeting payroll demands 
• Company advertising 
• Marketing and promotion 

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Qualifying for Asset-Based Loans

The majority of companies that obtain asset based loans are business-to-business entities, which make use of accounts receivable invoicing on a regular basis. These companies are typically in business sectors such as sales, manufacturing, wholesale and retail distribution. 

Yearly profits for qualifying could be anywhere between $1 million and $300 million or above. Generally, small to mid-sized businesses find asset-based revolving funding works best for their needs since this type of monetary advance can often be completed very quickly. Also, repayment schedules may be customized and less rigid than schedules for traditional loan term agreements. 

Asset based loans can be especially helpful to well-established companies and startups. For many, this type of funding becomes the deciding factor in whether they will overcome existing financial difficulties and attain success. 

For prompt loan approval, company owners and officers must provide detailed financial statements, including accounts receivable and accounts payable records. The lender may also require personal financial records from the business owner or owners. 

Other items required by the lender may be copies of invoices, customer purchase orders and an accurate listing of business equipment. In some cases, the company will also need to provide a copy of their articles of incorporation and by-laws with the funding application.

What Qualifies as Collateral for Asset-Based Lending?

Acceptable collateral for most asset based lending applications includes accounts receivable, inventory, business equipment, and factory machinery. Appropriate inventory may be both finished goods and marketable raw products. In some instances, certain personal assets of business owners may be requested by lenders as collateral. 

Accounts receivable is the most popular type of acceptable collateral that commercial credit financing lenders use when processing an application. This is partly because these accounts have an easy liquidity value. Additionally, this form of collateral has a pre-set value. 

Inventory is another acceptable form of collateral most favored by commercial credit financing lenders. This is mainly because inventory does not have the same stabilized value and liquidity as accounts receivable. This type of funding works best when inventory can be sold in exchange for cash. 

Since both accounts receivable and inventory are renewed throughout the year at periodic intervals, they are in the favored classification of “working capital financing.” 

Although they are often acceptable collateral for asset-based lending approval, manufacturing machinery and business equipment are usually more helpful when seeking a term loan from traditional banks. Their worth as collateral is longer lasting and equal to the duration of their useful operation. Currently, trademarks and customer lists also can be used as collateral for some asset-based loans.

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How Lenders Process Asset-Based Loans

When issuing loans based on a company’s assets, the lender requires the company to deposit invoice payments into a bank account that the lender controls and supervises. This type of account is called a blocked account. 

Typically, excess money that is deposited into this bank account is transferred to a working account for the company that received the loan to access. A revised version of this loan procedure (springing dominium) allows the depositing of funds to the borrower's commercial operations account. After deposit, the amount necessary for repayment fees is transferred to the lender or a blocked account. 

The commercial credit lender daily monitors the company’s assets and financial performance.

Businesses That Qualify for Inventory Financing

Any type of business that produces a single product or multiple products for distribution and sale may qualify for inventory financing from a commercial credit lender. For many product manufacturers, having a working relationship with this type of funding agent is essential for achieving and maintaining business success. 

Asset based financing is often the only method that provides continuous operational funds based on the value of a company’s product supply base. Typical production companies that may need regularly scheduled loans to finance inventory range from automobile and aircraft production and assemblage companies to digital electronics, furniture and toy manufacturers. Companies with factories that produce equipment for seasonal sports and leisure activities also rely heavily on asset-based lenders. Learn more about asset based lenders replacing banks.

Industry-Specific Qualifications for Financing

The application process for funding is basically the same. However, there are often industry-specific qualifications and reasons for financing. 

Inventory Financing for Automobile and Aircraft Manufacturers 

Generally, automobiles and aircraft have high market value. Inventories for these types of products can qualify for top dollar financing from commercial credit financing lenders. Even with the sophistication of modern assembly line production, these products take time and fine-tuning to complete. The end products must withstand careful inspection and complicated testing before being shipped to dealer showrooms or commercial warehouses to be sold. 

In addition, each automobile or airplane part – regardless of size or function – must undergo testing and scrutiny before it is used in the assembly line production stage. Because necessary parts revisions involve extra time and expense, large manufacturing companies for these products may require additional lending on inventory during certain phases of production. 

Although their inventories qualify for high levels of funding, they must work with commercial credit financing lenders that are always prepared to increase funding levels during all stages of product production. 

Also, monetary supplies needed for successfully meeting production schedules may vary greatly from year to year. For this reason, their funding agents must be prepared to adjust annual funding as necessary. 

Inventory Financing for Digital Electronics, Furniture and Toy Production Companies 

Manufacturers of digital electronics items have a shorter production schedule than manufacturers of autos and aircraft. However, digital products still require testing and assembly of many intricate, complex components. Because of this, there can be unexpected production delays while a part is modified or redesigned. 

Furniture design and production businesses may encounter slow-downs in factory completion dates for certain items. This is especially true when different types of wood, wrought iron pieces or hand-crafted glass and ceramic parts take longer to finish than other items or furniture piece components. 

Toy manufacturers often have numerous changes in production timeframes due to revisions in toy design, functionality and safety requirements. Toy designs are frequently subject to recall and revision for the sake of ensuring the safety of children. 

Because these potentials for production delays and necessary rescheduling exist, finance lending providers for these areas of the manufacturing business sector must be prepared for constant changes in the timing of necessary asset-based funding. 

Inventory Financing for Seasonal Sports and Leisure Equipment Manufacturers 

Seasonal sports and leisure equipment production companies also have specific needs and requirements to finance inventory. Their busiest production schedules are usually during off-seasons. 

For instance, water sports equipment manufacturers in New England produce equipment during the fall and winter for the following spring and summer seasons. Ski equipment producers in this region have busy manufacturing schedules during the warm months. 

Although some factories supplying wholesalers and retailers throughout the US may have balanced manufacturing levels during the year, regional production companies still have definite manufacturing months and designated sales and distribution months. 

Although many different product manufacturers have ongoing needs for asset based financing, each product type requires specific rates and timeframes for vital business cost funding throughout the year.  Learn more about how to get inventory financing for your business

Inventory Financing for Transportation, Warehousing and Distribution 

Staying current with the latest trends in warehousing security and product management can be challenging, especially for distribution companies with limited financial resources. These companies need an asset based finance solution that specializes in alternative solutions for business lending needs. 

Transportation, warehousing and distribution companies can see the value of outstanding invoices work on behalf of their corporate goals. This funding works for any business-related purpose, including the following: 

• Installation of RFID and radio tags for improved tracking of warehouse products that move throughout the transportation supply chain system 
• Increased physical security and repairs for warehousing facilities 
• Perform maintenance on fleet vehicles and trucking equipment 
• Upgrade computer systems to improve business performance 
• Expansion into new markets and geographical territories 
• New facility purchases or repairs of an existing facility 

These types of improvements can these companies an edge over competitors, while positioning them favorably for future growth and profitability. 

Asset-based lending solutions is also ideal for distribution companies. This is due to using outstanding invoices or purchase order funding and not using real estate, vehicles or other large-scale items of value as collateral. 

This allows maximum flexibility for distribution companies. Some might have expended the availability of traditional credit sources. Others simply need an added infusion of cash to finance expansion and manage their growing pains. 

Commercial credit finance lenders can design a portfolio of asset-based loans and lines of credit that helps distribution companies reach their full potential and increase their position within the industry. 

Staying current with new technologies and new trends in the warehousing, transportation and distribution marketplace can ensure companies attracts their fair share of business and maintain profitability even in tough economic times.

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What Makes Asset-Based Lenders Different from Commercial Lenders?

At one time, asset based finance loans were the last avenue of business lending possibilities. In recent years, they are the most frequently used method of funding for companies that lack an operational track record or acceptable credit rating. 

Young and growing businesses often find that asset-based financing is their best available option. Typically, they cannot qualify for loans from traditional commercial lenders because of stringent qualifying requirements. 

Commercial credit financing lenders base loan granting on collateral. Traditional banks often use credit ratings to grant loans. However, borrowers must be prepared to pay fairly high rates for borrowing. Also, lenders have the legal right to assume possession of the borrowing company's assets if payback amounts due become delinquent. 

Many banks also require company records over a longer period of time than do commercial financing companies, before granting loans. In addition, banks usually take much longer to approve loan applications than asset-based lending agents do, so prompt funding is often not available through banks. 

In recent years, commercial banks have entered this area of financing and began issuing asset-based loans to qualifying companies on a regular basis. However, due to the uncertainty of the economy today, such funding is still more difficult to obtain through these banking institutions. 

Yet, when using a finance company, cost to the borrower is greater due to higher credit risks. Interest rates on asset-based loans. However, rates are usually less than those on unsecured loans since lenders can take possession of non-repaying borrowers' assets.

Create a Diverse Financial Portfolio

Designing your company’s financial portfolio for future growth can strengthen your position within the industry. One way to do this is by maintaining a steady supply of cash on hand. This provides valuable protection against unexpected expenses and financial emergencies. 

Creating a diverse portfolio of lending and financing arrangements with a solid asset-based lender can help you meet your current obligations. You will also have enough wiggle room to take advantage of opportunities in the competitive marketplace. 

Leading alternative funding and lending companies in the U.S. offer an extensive range of choices that include loans on invoices, PO funding options and other loans on receivables and corporate assets. 

By choosing one of these lending options or combining them into an integrated financial portfolio, your company can enjoy added flexibility in managing all of your ongoing corporate obligations and financial needs. 

Get Started with 1st Commercial Credit 

The good news is you can get started today with exploring asset based lending options. At 1st Commercial Credit, we make it fast and convenient to apply for our lending programs. The application itself is only a few pages long and requires only a short time to complete. 

Although we require some financial documentation on your company, this type of information allows us to make the most informed decision regarding your company and its loan application. 

Once an application for these lines of credit is received, 1st Commercial Credit evaluates the assets being presented for use as collateral for these loans to determine their value. If your company meets our other requirements, we then offer you a loan secured by those assets. 

In many cases, we can provide you with a decision within just a few days. Most other lending companies need weeks or months to evaluate your application and get back to you with an answer. 

Our streamlined process makes it easier to get the financing your company needs today for maintaining its market position and staying competitive in today's challenging economy. The asset-based lending experts at 1st Commercial Credit will go the extra mile to ensure your company gets the right loan for its needs. 

Contact us today to learn more about how asset-based lending arrangements and loans on receivables can make a huge difference in your company's cash flow management strategy. At 1st Commercial Credit, your satisfaction is our highest priority

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