Companies coming out of a downturn and into a greater market expansion need capital to buy and sell. It’s a simple fact. Right now, with diminished sales from the prior period, many small and medium sized businesses need a way to keep business moving. Companies must stabilize their business, protect it from downside risks and ensure that it has the liquidity required to weather move ahead into a new economic scenario. Simply put, businesses need to identify ways to empower growth out of an unusual an economically rocky period.
There are Solutions
It’s important to remember that there is more than one way to approach moving money, selling products and providing services. One possible avenue is for businesses to request extended payment terms from their suppliers. Our suppliers may be in the same scenario as we are and likely want to accelerate cash flow themselves. However, they know that if they put the burden on cash strapped providers, it will ultimately hinder sales recovery.
When providers are unable to grant credit or extended repayment periods a business can fund a high-value purchase order with a hard money loan against assets. This could work well for a business with a sudden custom order request from a reliable client. They could take out a short-term loan against property that is repaid in full when the customer remits payment. However, this won’t work for everyday business. It’s best to use this option when there are ready buyers rather than on the hope that purchasing goods or materials will result in new customers.
Factoring
If you are in the situation of the supplier, extending payment periods to your customers, how can you accelerate access to funds to continue fulfilling orders? Factoring is a financial transaction in which a business will sell its accounts receivable to a third party business that handles billing. This is not a loan, but is instead the sale of an asset. You sell the accounts receivable asset such as a PO or contract for up to 80% of the cash value up front. The factor then collects from your client and retains a factoring fee, remitting the rest of the payment to your business.
Factoring makes it possible for companies to quickly build their cash balance up and pay any outstanding obligations. A business will sometimes factor its receivable assets to meet present and immediate cash needs.
Asset-Based and Unsecured Loans
In fact, any “working capital” line item can be leveraged in an asset-based loan to meet short-term needs. These items include raw goods, stock on hand and accounts receivable. You can leverage the assets for a revolving line of credit.
A business may need to consider a revolving line of credit, as described above or a fixed term asset-based loan. If your business has assets such as buildings, land or high value equipment, leveraging the assets for a loan up to 80% loan to value can help you reduce interest rates over an unsecured loan.
Unsecured loans, are not protected by any collateral. Instead of depending on a borrower’s assets for security, lenders approve the unsecured loans based on a borrower’s creditworthiness or demonstrated cash flow. For lenders, these kinds of loans are riskier than secured loans, so they often demand higher credit scores for approval, provide a lower lending limit, or require higher interest rates than secured loans.
The Upside of Asset-Based Lending and Unsecured Loans
Once lenders approve your loan, funds will be transferred to your account or you’ll receive access to your line of credit. You’ll then apply the funds to business assets or expenses as laid out in the lending agreement.
With an unsecured loan, the plus is that your personal property isn’t at risk in the event of a default. This way, you don’t have to worry about losing your valuable business assets.
The Downside of Asset-Based Lending and Unsecured Loans
In asset-based lending, the asset is tied to the loan as collateral. If for any reason you default on the loan, there’s a chance you may lose access to necessary equipment or property to fulfill customer orders.
The biggest risk with an unsecured loan is the hit to your credit score, which will impact your ability to receive further funds. You may face legal action, leading to a judgment against your business or your personal income.
Unsecured loans may be difficult to obtain if you have limited credit history or irregular income.
Next Steps
Talk with us about your business goals and objectives. We are able to help you identify which financing options are best for your circumstances to help you access the funds, tools and technologies you need to advance your business.
Our goal is to provide you the insights and options to make sound financial decisions for the road ahead. Call to speak with one of our loan brokers today.
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