An Introduction to Asset Based Financing
In recent years many businesses have discovered that due to increasingly stringent lending criteria, procuring traditional forms of finance has become more difficult. One option open to a business that has failed to receive a positive result from a business loan application, is to consider asset based financing as an alternative way to raise capital. Asset based financing is one of the most efficient and cost effective ways to procure additional finances.
Asset based financing allows the business to use certain business assets as security against an advance of funds. Several types of commercial assets qualify for this kind of borrowing, including stock inventory, high value plant equipment and financial assets such as accounts receivables. For the purpose of this brief introduction we will focus solely upon the use of financial assets to secure funding.
Almost every commercial venture will have an amount of working capital tied up in overdue and unpaid accounts receivable invoices. If the level of funds toed up with debtors increases to a dangerously high level, then cash flow can become affected, and in some extreme cases the business will find it impossible to meet its operational overheads. In this situation asset based financing using accounts receivable as collateral makes perfect sense. The business will reclaim almost the total value all of the outstanding invoices, freeing up a larger pool of working capital.
Asset based financing secured in this fashion can be extremely cost effective. Typically an invoice factoring company will charge between 1.5% and 3.5% of the value of invoices presented for factoring. In many cases this percentage is below the interest rate of a comparable business loan. Further cost benefits are presented in the form of decreased administrative overhead, as the factoring company will deal with the collection of the invoices which are to be factored.
The current global economic climate continues to deteriorate, traditional types of borrowing are becoming less attractive and more costly to secure. Asset based financing presents a method by which working capital can be raised, cash flow boosted and administrative overheads lowered, all in a more cost effective package than standard forms of borrowing. Any company which is currently contemplating ways to raise capital should consider asset based financing as the preferred way in which to raise this additional finance. Overall, asset based financing is arguably the best way for small and medium business to procure additional working capital over the short to medium term. |
