When you first launched your business, there is a good chance that there weren’t a lot of options available to you for borrowing money. Usually, it takes time to get your credit score built up and lenders don’t like taking big risks on brand new companies.
This often results in many new business owners factoring in their receivables whenever they need some extra money.
However, if you have been in business for at least a couple of years, it might be possible for you to upgrade your finances. There is a natural progression at that point to add asset-based loans along with factoring.
Factoring involves selling some of your customer invoices off to a financing company, which is called a factor. You will then be paid upfront for the amount of the invoices by the financing company, less their fee, and they then collect payments from your customers.
Although factoring is convenient, it also is limiting. You only are able to borrow based on the sales and account receivable collections that your business is making. If the only way to increase your revenue is through borrowing money for expansion, factoring can leave you stuck. You are at the point where you aren’t making the necessary sales to borrow additional funds but without additional financing, you can’t make the extra sales.
Advantages to taking out an Asset-Based Loan (ABL).
One way that you may be able to get out of this tough situation is to take out an asset-based loan. An ABL involves borrowing money and then paying it back with interest, just like you do with a traditional bank loan. The main difference is the loan is secure with valuable business assets – such as certain machinery or your inventory. When they are first getting started a majority of businesses don’t own those assets yet, but after a couple of years it is more likely that they will have the necessary resources for taking an ABL out.
The main advantage to taking an ABL out is that more financing will be accessible to you. Your financing will not be limited to the amount of your unpaid receivables. That can significantly free more money up that can then be used for growing your business. In certain situations, an ABL might have lower borrowing costs than factoring does. However, that isn’t always true, so you need to compare the numbers for both of the scenarios.
Things to consider before you take an ABL out.
Before you get an ABL, there are some drawbacks that you need to consider first. If you are going to borrow money using this type of loan, you need to make sure you will be able to handle making your loan payments. If you are unable to keep up with your loan payments, eventually your lender could end up seizing your asset. Losing machinery or inventory when your business is struggling already would worsen the situation even more.
You will also have to pay interest on the money that you borrow. It can add up and become a significant cost over time and has the potential for hurting your bottom line. If your company is going to borrow money, be sure you have a plan for spending it productively and in such a way that it will put your business in a much better financial position.
When an ABL is used properly, it can be a very valuable financing strategy to use. When ABL is combined with factoring, it should give you access to all of the money that you need for taking your business up to the next level.