Source of Financing for Your Small Business

by : Kris Koonar

Asset based lending is a type of loan offered by the finance companies to the businesses, big or small against their assets like accounts receivable, inventory etc as collateral. In other words the lending companies will provide finance to the small businesses that lack sufficient cash flow for various operations. However, they have the assets, which they can offer as collateral against the loan amounts. For the lending companies the asset is of more relevance than the cash flow status or the balance sheet figures. This type of finance is beneficial for small businesses to get timely finance for the growth of their businesses.

Small upcoming businesses often are denied loans by the traditional banks. This unavailability proves to be restrictive to its growth. Asset based lending gives them this opportunity to finance the business by investing the equity of their current and fixed assets. They can get loans, if they hold accounts receivable, inventories, machinery, land and other assets. Some companies even provide customized loans to suit the needs of these small businesses. The rates of interest of these asset based loans are lower than those of the secured loans. As the lender has the asset as collateral, the loan is safeguarded and in case of non-payment the company may settle the loan by taking over the asset.

The small businesses or the upcoming businesses do not have a credit history. Asset based lending relies on the value of assets of the business and not the credit history of the business. Thus, this source of finance is more suitable for small businesses. Asset based financing gives greater liquidity helping the businesses to have a better cash flow. It is available easily, when working capital is required quickly to grasp any growth opportunity that comes the way of the small businesses. When the small business has a growth opportunity, they are able to get the finance needed quickly and easily from the lenders. The flexibility and speed of finance allows the businesses to get the benefits of seasonal demand that is beneficial for its speedy growth.

The payment plans of the asset-based loan are flexible. The short-term loans are paid off in a short period from the accounts receivable and the inventories. Moreover, as these loans are to be repaid on time, the small businesses ensure that they collect the accounts receivables on time and bring about a discipline in the overall inventory management. Loans are not given for the works, which is in progress, but is given for the completed production. Thus the production process is also made efficient.

The lenders may give the small businesses some time, if they are unable to pay within a certain period as the collateral is secured with them. In case of non-payment by the business, the lenders may recover the amount by selling the asset. The lenders provide services to all sorts of industries like small units producing auto components, consumer products, foods and beverages and so on. They can provide customized services to these businesses as per the financial needs of the units. The expertise of the lenders in different industries helps the small units to handle their finances better.

The asset based lending is a blessing for the small businesses in the current financial scenario. Their requirements of working capital, major capital expenditures and so on are taken care of, by such finance options, which are available.