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Asset-Based Loans

Got collateral? Then you could get one of these loans.

Opinions expressed by Entrepreneur contributors are their own.

Definition Or Explanation: Asset-based loans are usually from commercial finance companies (as opposed to banks) that are offered on a revolving basis and collateralized by a company's assets, specifically accounts receivable and inventory.

Appropriate For: Companies that may be rapidly growing, highly leveraged, in the midst of a turnaround or undercapitalized. In addition, asset-based financing works only for companies with proven accounts receivable, and a demonstrated track record of turning over their inventory several times each year.

Supply: Overall, the supply of asset-based financing is vast. A large number of commercial finance companies, as well as many banks, have massive pools of capital to lend to businesses. However, for smaller asset-based loans, those of $500,000 or less, the market is considerably smaller. Most asset-based lenders would prefer to make larger loans because the cost to monitor an asset-based loan is generally the same whether it is large or small.

Best Use: Financing rapid growth in the absence of sufficient equity capital to fund receivables and inventory. Asset-based loans can also be used to finance acquisitions.

Cost: More expensive than bank financing since asset-based lenders generally have higher expenses than bankers. Still, pricing is competitive among asset-based lenders. Small asset-based loans can be pricey, though, running 12 percent to 28 percent.

Ease Of Acquisition: Comparatively easy if your company has good financial statements, good reporting systems, inventory that is not exotic and, finally, customers who have a track record of paying their bills. If you don't have any of these, your path to an asset-based loan will be challenging.

Funds Typically Available: $100,000 and greater.

From Where's the Money? Sure-Fire Financing Solutions for Your Small Business, by Art Beroff and Dwayne Moyers. (c) Entrepreneur Press, 1999.

An Asset-Based Altenative

Slightly farther up-or farther down the food chain, depending on your perspective-is another source of asset-based financing: suppliers. In fact, suppliers already offer financing by giving most of their customers 30 days to pay their invoices. Many businesses need asset-based financing because their sales cycle is longer than their accounts payable cycle. After all, if you could purchase goods on 30-day terms, sell them and be paid within 15, who would need financing? Unfortunately, most sales cycles take more time.

So before talking to a commercial finance company, start with your suppliers. There are two ways to do this. The first is simply not to pay invoices until they are 90 days old. This gives you three months of financing-in some cases free. You will know this strategy is working if your supplier does not freeze shipments to you after your first invoice is more than 60 days old. The second way is to simply ask your supplier to extend your payment terms. If this is offered in conjunction with a lien on the materials it sells you, the vendor might just bite. After all, even if it doesn't have the cash from you, it has still booked the sale. If your supplier is under pressure to show sales growth quarter to quarter, or year to year, your sale, even if it takes 90 days to collect, is helpful to its cause.

Another way to get a couple of extra days out of your supplier is to test its limits. For instance, if you pay your invoices in 30 days, pay them at 35 days for a few months. If no complaint arises, then stretch payment to 44 days. Why does this work? Because many accounts receivable collection systems flag payments that are older than 45 days. Therefore, if 35 days isn't a problem, chances are 45 days is the magic number to avoid to keep your supplier happy.

From Where is the Money? Sure-Fire Financing Solutions for Your Small Business, by Art Beroff and Dwayne Moyers. (c) Entrepreneur Press, 1999.

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