Your small business is doing well, and you’re ready to expand so that you can generate more revenue and capture a broader piece of the market. However, to do that you need capital. Getting the financing necessary for business expansion is a challenge that many entrepreneurs face, but it’s not one that should slow down progress.
In many cases, business owners assume that they have to leverage personal property or assets to secure financing for their company. However, chances are that you have assets related to your operation that you can use instead, and in many instances, the asset you are acquiring is what you are borrowing against.
Today, we want to discuss the ins and outs of asset-based financing. We’ll go over the different types available, as well as the potential advantages (and disadvantages) they can offer.
Commercial Real Estate Loan
If you own property for your business, then you can borrow against it. Commercial real estate loans are used mostly by companies that don’t have a stellar credit history, as the property itself offers collateral for the loan. In many instances, the loan can be worth up to 90 percent of the value of the property.
One of the advantages of this kind of lending is that you can use the money for a wide array of business expenses. Whether you need a cash flow infusion or you want to expand your company to other properties and units, this money is pretty flexible.
The downside of commercial real estate loans is that you have to own the property (rather than renting). Also, if you don’t pay it back, you could lose it altogether.
Inventory Asset Loan
As the old saying goes, you have to spend money to make money. If your business is based on selling products and inventory, you have to have enough capital to buy them in the first place. Unfortunately, for a variety of reasons, companies may find themselves short in these situations.
Fortunately, an inventory asset loan can help. This loan is designed to provide financing for purchasing a certain amount of product to be sold by the business. Typically, the inventory will be evaluated to ensure that you can make enough to pay back the loan within the terms set forth by the lender.
In these cases, inventory asset loans can cover up to 90 percent of the value of what’s being purchased. However, as you can imagine, the money is designated solely for this purpose. You can’t use the loan to pay for other expenses, such as bills or real estate.
That being said, when it comes to growing your business, having the flexibility to offer new products can give you a competitive edge. Rather than raise the capital yourself, you can use an inventory asset loan to get what you need.
These kinds of loans are similar to commercial real estate lending. Rather than putting your property as collateral, you offer business equipment instead. Whether it’s construction vehicles, heavy machinery, or factory devices, the equipment has to be used solely for business purposes.
Usually, these loans will assess the value of the equipment being borrowed against and provide up to 90 percent of its worth. You can work with your lender to decide how much gear can be used for the loan.
Another consideration is whether the machinery will be valuable for the long term. If you have old equipment that will need to be replaced in a few years, it won’t be worth much to your lender as collateral.
Factoring is the process when a company will buy your outstanding invoices from you. If you have clients with 30, 60, or 90-day terms, sometimes you need the money faster. Factoring companies will look at the value of your invoices and offer cash payment upfront, usually around 70 percent of the total. Once the client pays the invoice, you get a remainder, minus the factoring fee.
This kind of financing is really great because there’s nothing to repay. Your clients are the ones covering the cost, and thus, your credit score and rating are not evaluated. In most cases, you can borrow against as many or as few invoices as you like, and there is no contract necessary.
As part of expanding your business, you will want to buy new properties. Whether they are storage units, new offices, or retail space, purchasing commercial real estate can be expensive. Fortunately, you can usually apply for acquisition financing to help out.
These loans are longer term than most of the others on this list, and they typically require up to a 10-percent down payment. Also, the money can only be used for real estate purchases, so this financing isn’t ideal for cash flow problems.
Contact Us Today
Securing money for your growing business shouldn’t be a hassle. We make it easy to get the financing you need without making you jump through hoops. Contact us today to find out more and see how our asset-based funding solutions can help your business.