For small businesses, cash flow concerns can arise unexpectedly to take a significant toll on day-to-day operations and your plans to build for the future.
In order to offset these issues and keep their company ticking along, many business managers are turning to asset-based finance as a solution to their short-term cash flow problems.
What does asset-based financing involve?
Asset financing is a process through which a company uses its own assets to gain access to funding that would otherwise be unavailable to it, usually owing to poor or mediocre credit ratings.
A company might decide to sell some of its assets in order to raise the short-term finance they need or they may use their assets as collateral to access secured loans that might ease cash flow concerns or help them make other important investments.
If you’re a business boss considering what assets you might have to sell or to leverage as part of a credit arrangement, you may think immediately of physical equipment or property assets. However, accounts receivable and invoices issued to reputable customers are assets too and they can be used to generate a cash advance via invoice factoring or to secure a loan through invoice discounting.
A useful option
Asset financing, whether it involves your company’s property, inventory or outstanding invoices, can give small businesses the lifeline of access to cash or credit in the short term. In an ideal world, there would be no need for a business to use their assets to raise finance but as a means of weathering a financial storm, the option can often prove absolutely invaluable.
The reality for many small businesses is that their applications for loans are often turned down routinely and the legacy of financial difficulties can linger long after the biggest obstacles have been overcome. Asset-based financing can be a great help to companies that have established strong operational foundations but run into short-term difficulties that need immediate resolution.
Avoiding worst-case scenarios
Asset-based finance is also particularly useful and important for businesses that are struggling to keep up with their bills and are facing the prospect of becoming insolvent. When creditors are clamouring for payment and it is impinging on your ability to function smoothly or at all then asset-financing options can become appealing and practical solutions.
What you need to know
Asset-based financing isn’t right for every business and there are issues that company bosses should be aware of before entering into such an agreement. First of all, when you establish a line of credit with your assets as collateral then you run the risk of losing them under circumstances in which you are unable to pay back any interest accrued.
With invoice factoring, you are only obliged to pay the interest on amounts borrowed via the lines of credit secured. Taking on debts in this fashion should always be considered carefully but, when used appropriately, using your invoices as assets in a financing arrangement can afford very valuable and even vital flexibility to small businesses in any sector.