The number one reason for business failure in the U.S. today is lack of working capital!
Businesses need money to grow. A business cannot survive just because it has a better product, an exclusive market or the best method of distribution. Funding in the form of working capital and cash flow is required for progress!
But where does a business go when the bank says no?
Asset-Based Lending – What Is It and How Can It Help?
The asset-based lending industry helps a business to leverage its “liquid assets” (most commonly accounts receivable, i.e. invoices/contracts, purchase orders) and gets cash to the business much faster than traditional sources.
As a result, the business has this cash for day-to-day operating expenses — when it is needed – rather than having to wait. Then, the business can do what it does best – it’s business – and produce the best quality product and/or service while escaping the, “Is the check in the mailbox?” syndrome so many businesses encounter.
One of the differences between the asset-based lending industry and banks/traditional sources is this industry looks at the company or business PAYING the invoice, bill or contract for its security as opposed to the credit history, cash flow and time in business of the business issuing the invoice.
Unlike traditional sources, asset-based funders do not have a “commercial lending section” to handle all business funding requests. Rather, there are specific funders who specialize in construction, manufacturing, the trades, professional fields such as engineering, medical, etc. They know that “one size” does NOT fit all when it comes to business funding needs.
Asset-based lending has always been available to “big business” but is just recently becoming utilized by “small business.” The business world has begun to realize what the SBA has been saying for a long time, “The total of small business is larger than big business,” and wants to tap into this gold mine.
Banks, realizing it is in their best interest, oftentimes send clients they are unable to help to asset-based lenders. Then, when the client has the financials the bank needs, their friendly banker who referred them to the asset-based lender can re-enter the picture.
Asset-based lenders also work in conjunction with an already established banking relationship. However, they are able to be much more responsive to the urgency of a businesses cash needs to take advantage of profit opportunities when they present themselves. For example:
Right after Katrina, a purchase order funder in the asset-based lending industry was able to help a power company fulfill a $2.2M order from the USACE. The power company’s bank was not able to process their funding request fast enough and they were about to lose the order. The purchase order funder took the application on Wednesday and the order was being shipped by Friday of the same week. The power company was able to fill that order and other future ones due to the speed with which they were able to get the funding they needed.
When evaluating an asset-based funding deal, the cost of this funding should be considered in the context of the benefits to be received rather than on a stand-alone basis. Compared with other financing alternatives, asset-based lending is very cost effective and efficient and is there “when” you need it to take advantage of profit opportunities in the market such as we now have in Louisiana, post-Katrina.
As an example, we all want to shop at Wal-Mart (banks) and get the most for our dollar. However, Wal-Mart is often crowded, takes too long, or is not close enough if we live in smaller communities. So, we pull into the convenience store or other smaller, boutique-type merchant (asset-based lenders) where we know we can get what we need right away, when we need it, even though it might cost a little more. When a business needs funding, it NEEDS it then and not later!
Russell Handley, owner of a communications company in Newburgh, NY installs cable lines for large cable companies. It is standard for these firms to take as long as 90 days to pay bills. So, Handley uses factoring on occasion and gets his money quickly for his invoices that allow him to take on more work. In fact, he credits factoring with having helped him increase his annual revenue from $500,000 to nearly $4 million in seven years. “We wouldn’t have grown as fast as we did without it,” he says. (Pofeldt, Elaine. “Raising Capital.” Success May 1999.)
Some of the most commonly used options available through asset-based lenders are:
1) Accounts Receivable Factoring
2) Purchase Order/Contract Funding
3) Business Credit Card Receipt Advances
4) Equipment Leasing
So, in the future, “If Your Bank Says No,” why not check out the options offered by the asset-based lending industry.
Copyright (c) 2006 Cash Flow Connections