Concerning Asset Based Lending Systems
In commerce, when goods are bought and sold and deliveries are made it would be most ideal if immediate payments for the goods were made, in the manner of barter transactions except that cash or a monetary document such as a check could be used. This may be construed as be too complex in today’s business world. In fact nowadays it rarely occurs. All businesses are required to have some cash reserves in order to cover the purchase of new goods or raw materials that have value added or being consumed as component parts of a manufactured product. Most businesses try to establish a line of credit so that they are able to pay for purchased goods at a later date. You may be able to pay for purchases later, a deferred payment, but usually it also means that you must wait for payment for goods that you sell. It might be seen that products that have been sold but not yet paid for are a liability, but in fact they represents future cash that will be received, which is an asset. So, future payments are assets, and they plus the inventory of finished goods on hand can be used to your great advantage. You can actually borrow money on these future payments because they represent guaranteed future income.
You can take advantage of your situation like this to obtain funds to improve your firm’s cash flow using a method called Asset Based Lending. This system administered by 1st Commercial Credit is also called factoring. This type of financing is not precisely a loan. It is the trade of future receivables for cash. The credit limit established is not based on your company’s balance sheet, which is what any bank will look at when they analyze a typical loan application. Instead, the credit line is based on the value of the receivables traded and in some cases the value of any unsold inventory. The firms that will pay the bills for the goods already sold are also evaluated. The type of company that will get the greatest benefit is an undercapitalized firm that has a consistent flow of receivables. Firms often face challenges from business that grows faster than their cash flow rate. Asset Based Lending fits the business models of manufacturers, distributors and service providers that have a leveraged balance sheet. Such a company will often obtain greater borrowing power with Asset Based Lending than they would get from an ordinary bank loan.