Right now, many businesses are struggling with cash flow and turning to lenders for help. Before jumping on the bandwagon, it’s essential to weigh your options carefully – especially when it comes to the practice of asset-based lending.
Understand Asset Based Lending Before Committing
Asset based lending allows business owners to take out loans based on the total value of both fixed and liquid assets.
Fixed assets are things like heavy equipment, manufacturing machinery, or even property that the business owner has on hand. Liquid assets refer to things like invoices or other assets that may not be on hand at all times, but that are guaranteed through routine.
These assets are used as collateral in case the business owner should default on the loan. While this makes it possible for more entrepreneurs to receive the financial help they need to increase or stabilize cash flow, it also puts a crucial part of their business as risk should they not be able to pay it back.
Manage Your Risk Through Research
An asset-based loan can keep a business afloat during times of insecurity, as many are experiencing through the current pandemic. It can also be an excellent source of quick cash when a business is ready for rapid growth through expansion.
However, it’s important to properly research the terms of the loan, and to forecast the future financial prognosis of the business.
If the company is caught in a regular decreasing revenue trend, then an asset-based loan could actually force it further into debt. The basis for all asset-based loan decisions should be whether the company will be able to use the money to improve cash flow enough to pay the loan back.
Be Smart When Choosing a Lender
When choosing a lender, look for transparency and lending history. For more expert insight into asset-based lending, contact First Source Capital today.