Understanding the Different Types of Asset-Based Financing

Sometimes your company’s profits do not balance out your costs, whether because your customers have not purchased as many items or because you have unusually high expenses. When you cannot make your budget balance on your own, you need to find an alternative source of funding. Before you become stressed because you do not qualify for traditional loans, consider turning to asset-based financing methods such as asset-based loans.

Sell Your Accounts Receivable

You may already use one method of asset-based financing without realizing it. Selling your accounts receivable, also known as factoring, involves selling your invoices to a third-party company. This company gives you the value of your invoices minus a fee and then makes a profit by collecting the full value of your invoices when your customers complete their payments. While you may not like the idea of losing some of your money, remember that selling your invoices gives you early access to your profits. Additionally, it is much cheaper than the interest you would pay on a loan of the same amount and you do not have to pay the fee regularly. Furthermore, if your customers are late on their payments, their tardiness has no impact on your credit score, whereas if you are late repaying a loan, you weaken your relationship with your lender.

Secure New Loans

Sometimes, the value of your accounts receivable is not enough to sustain your business, so you must use asset-based loans. When you apply for these loans, your lender looks at the total value of your assets, including your accounts receivable and equipment, and decides how much money to give you. Because your valuable property serves as collateral, you receive more money than you normally would given your financial history and available cash. Additionally, most asset-based lenders do not specify what you must use the money for. If a sudden change in your finances occurs, you do not have to receive your lender’s approval before diverting funds to a new project. Furthermore, these loans are far less likely to adversely affect your credit score than unsecured loans.

While some people look down on asset-based financing, more and more people are realizing how useful and beneficial it is. Not only does this method increase your chances of receiving enough funding, but it also eases your lender’s anxiety about you defaulting on your loan. The next time you need money for your business, talk to your lender about putting asset-based loans to work for you.

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