Busting 3 Common Myths about Asset-Based FinancingPosted by Factor Funding Co. on May 26, 2015
Rather than seek out unsecured loans, you may fare better by using assets already in your business' possession to get the funding you need. You can approach this source of money more confidently by learning facts that will bust three common myths of asset-based financing.
Affordability of Asset-based Financing
You may have heard that asset-based funding is expensive, more so than a traditional bank loan. However, when you compare the two options side by side, you will come to realize that funding secured by your assets can be just as affordable as a loan from a bank.
In fact, many business owners like you use accounts receivable to secure this kind of financing. When you sell these invoices, you can get most of their value upfront. You may have to pay a small discount fee, but this fee often proves to be much less than what you would pay in interest on a bank loan.
Even more, the fee is a one-time expense while interest on a loan recurs each month. Interest can add a significant amount onto the loan's principle, causing you to pay back way more than you borrowed. In contrast, the fee you pay for factoring your invoices takes only a small amount away from their total value, leaving you more money to grow your business.
Flexibility of Asset-based Cash
When you apply for and get a loan from a bank, you often are restricted in how you can use that cash. The application may have asked how you plan to use the money, thereby putting limits on how you can use it for your business.
In fact, if you use the money for any purpose not stated on your application or in your contract with the bank, you could risk running afoul with your bank lender. The bank may demand that you pay the money back or pay heavy penalties.
Alternatively, asset-based lenders tend to be more flexible, with most having no opinions about how you use the cash for which you are approved. Once you have your money in hand, you can use it to grow your business by:
- Buying advertising space online and in local print media
- Making payroll for employees
- Hiring and training new employees
- Purchasing inventory and supplies
- Recruiting new clients and expanding your customer base
Your lender will not ask for an accounting for how you spent the money or bind you to strict terms for it use. You have the flexibility to decide how and when to make use of the money for which you are approved.
Availability of Asset-based Financing
A prominent myth about this type of funding states that only financially-troubled companies use asset-based financing. This myth can be dispelled easily when you consider the risk involved with unsecured loans.
Unsecured loans are just that: They are not secured by collateral that could pay off the principle if a business suffers a financial crisis. The borrower will instead have to pay back the loan, even if his or her business has failed.
If a person's company has gone under and left the owner with no money to pay back the loan, that individual's credit rating will take a hit. Had the financing been secured with assets like accounts receivable, this person would not be left to pay a debt that the business can no longer afford.
With that, both growing and well-established companies prefer asset-based funding. They know that little risk exists to their credit and payment history. Their funds are based on the value of their collateral.
By dispelling the biggest myths of asset-based financing, you can approach this source of cash more confidently. These facts show why this type of funding works better for many business owners today.