Leveraging Inventory for Cash With Asset Based Loans
Your inventory is a tangible asset that can be liquidated into instant cash. In fact, this is how you make money, by selling your inventory for a profit. This inventory can also be leveraged to take out asset based loans, which provide operating capital for your immediate financial needs.
Who Issues Asset Based Financing?
Banks and other lending institutions issue asset based financing. This type of funding isn’t different from a mortgage or other secured loans. You take out the money for a financial need, and the bank uses the asset as collateral for the loan.
What Is the Loan Approval Process?
The loan approval process varies from institution to institution, but generally you will need to present your company financials, including your balance sheet, to show that you are managing a successful business with a projected future profit. You will also be required to fill out an application and demonstrate creditworthiness in paying your bills.
Is There Interest on Asset Based Loans?
Yes. Just like any other loan type, asset based financing will come with monthly interest and possibly additional audit and due diligence fees. The good news is the interest rates aren’t as high as other loan types, because you are securing your loan with your liquid assets.
How Does a Business Use Inventory to Leverage the Loan?
Think about the mortgage example used above. If you are taking out financing to purchase inventory that you plan on selling or using to manufacture a product, the bank will use that inventory as collateral to back up its loan. You are borrowing money and using the product that you are purchasing to secure the loan while you pay it back.
What Happens if the Business Defaults on the Loan Payments?
As with your home’s mortgage, if you default on your asset based loans, the bank will take possession of the inventory you leveraged as collateral. This is why it’s important to ensure the bank and yourself that the inventory you are purchasing will turnover into the projected profits you are anticipating.
No business wants to take out loans. It’s much better to pay for everything in cash, but unexpected slow times, an unanticipated opportunity for expansion, the need to stock more inventory for summer and holiday sales, all of these are costs that might need asset based loans. You get the cash you need to move forward with your operations, and the financial institution gets paid back by the future profits the funding helped you accrue.