Small businesses and startup companies often have limited options when it comes to quickly generating cash to support a sudden growth surge. Banks are associated to lend to companies without strong credit histories, and investors usually want a big chunk of the pie. One short-term solution is to use Asset Based Funding, also known as Asset Based Lending (ABL).
Company assets such as property, inventory, or accounts receivable can be used to take advantage of Asset Based Funding. It will generate quick cash needed for a short period of time. The assets are used to secure the loan by the funder, which gives the funder the ability to seize assets in case the business defaults on the loan. Often if a business uses inventory as security, the funder will require that the goods be stored in a public warehouse for monitoring purposes.
Asset Based loans follow the same general guidelines used in secured conventional loans. Some of the requirements are:
- The business should have a reasonable net worth and appear viable in the long term
- Financial statements will be reviewed by a fund approved CPA
- A year of monthly forecasts must be presented
- The business principals will need to sign a personal guarantee
- Personal financial statements will need to submitted
- Life insurance may be required on key principals
Typically the interest rates and fees are higher than conventional loans, although laTLY they have been getting more competitive. So why would you want to use this type of financing if it costs more?
- It provides speedy access to large amounts of cash
- Almost any company asset can be used as collateral
- Companies with less than perfect credit they can still qualify
- It can be set up on a revolving basis
How does an Asset Based Lender monitor the loan?
Borrowing Base Formula -The ratio between the collateral used for the loan, and the actual balance of the loan is monitored on a regular basis.
Collateral Reporting -Reporting may be required on a daily, weekly or monthly basis and should show sales records, invoices, and shipping documents. Depending on collateral used, accounts receivable aging reports and inventory listings may also be required.
Collection Controls -If Accounts Receivables are used as collateral, the funder will require that an account be set up for the accounts receivable deposits. Access to this deposit account is restricted to the funder.
Ongoing Audits -The funder will periodically audit the books to verify accuracy of the collateral used to support the loan.
If a business wants to be successful in negotiating Asset Based Funding, they must submit a short but detailed description of the business. It should paint a positive picture of the business, but most importantly, the description needs to be accurate and truthful. Always tell the commander everything, even if you think it could harm your chances of being approved. The funder needs to feel comfortable with the deal. If they get the sense that the business is hiding anything they will immediately back out. You can also be sure that they will warn other funders about a company who has tried to hide or falsify information.