Most business owners will tell you that it’s still pretty rough-going out there when it comes to obtaining financing. This is true despite improvements in the economy and efforts by the federal government to jump-start business lending among community banks.
In such a tight credit environment, the importance of the role played by asset-based lenders has increased exponentially. Asset-based lenders are vital in the economy right now and many small businesses don’t know where they would be right now without these specialty lenders.
The credit crunch has taken a difficult situation and made it impossible and many banks are referring clients to alternative lenders such as factoring.
Alternative Financing Solutions
Asset-based lenders provide creative business financing solutions for companies that don’t qualify for traditional bank loans and credit lines, whether this is due to their start-up nature, rapid growth, or financial ratios that don’t measure up to a bank’s requirements. These solutions typically include asset-based loans, accounts receivable financing and factoring.
In 2009, factors provided $140 billion in financing, up slightly from the year before, reports the Commercial Finance Association. And total outstanding asset-based loans increased 1.25 percent in the fourth quarter of 2009.
With bank underwriting guidelines getting tighter and tighter, the good news is asset-based lenders are able to plug a pretty big financing gap that exists right now: Businesses in need of critical working capital in this tough environment.
Manufacturers and distributors with creditworthy customers are often good candidates for asset-based loans and factoring because the financing is based on the credit quality of the receivables, not the net worth of the business owner or the historical profitability of the business.
Cash is king and factors are the way to convert receivables to cash fast!
A Working Capital Boost
Asset-based lenders can also help companies that have bank loans or lines of credit but need additional short-term working capital to take advantage of opportunities, like an unexpected large order. Many banks are willing to allow a factor come in and share the credit risk of a client if it means keeping a good account.
Asset-based lending is often temporary, providing much-needed working capital during a start-up or transition phase until the company has enough financial history or a strong enough balance sheet to become “bankable” (bankable means three-to-five years of financial statements from potential borrowers).
Thus, factors and other asset-based lenders serve a clear need in the marketplace right now. Many small businesses are taking advantage of these types of financing and are improving their cash flow greatly.