Using Asset-Based Loans for Inventory and Equipment Financing

Asset-based loans can help these businesses meet the challenge, efficiently and effectively.

Asset-based lending (ABL) is a type of business financing that focuses on the value of a company’s assets. Those assets serve as collateral for the loan. Generally, lenders will look to an asset like accounts receivable first, and then operating inventory and equipment. Real estate and intellectual property can also be considered for applicable businesses.

Benefits of asset-based funding

1. Ability to purchase inventory and equipment when you need it.
   To run their business, retailers need goods to sell. Transportation dealers need vehicles to sell. Manufacturers of construction equipment need parts to make their equipment. Asset-based loans provide the cash to buy the products they need when they need them. It could be to handle a large order, take advantage of an unexpected market trend or simply to maintain comfortable inventory on hand. Proceeds from an asset-based loan may also be able to make volume purchases – and accompanying discounts – possible.
2. Ability to weather ups and downs in revenue. Companies that have substantial inventory, but experience fluctuations in revenue, can use asset-based loans to improve stability and increase growth. Seasonal businesses are prime candidates. An outdoor-equipment retailer will likely experience higher demand in summer; a liquor distributor may need to stock up in advance of particular holidays; a construction equipment manufacturer may see higher demand in spring months. In each of these situations, there could be a gap between when payments are due to suppliers and when the business collects the proceeds from its customers. An asset-based loan or line of credit would provide needed flexibility. ABL can help with the ups and downs are on a more macro scale, too. For example, when brick-and-mortar retailers closed during the pandemic shutdown, some could leverage their inventory to secure an asset-based loan, which they used to ramp up online business models.
3. No other collateral needed. Many companies are familiar with cash-flow financing, in which lenders loan based on revenue and earnings metrics. In contrast, ABL lenders loan money based on inventory, accounts receivable and equipment. This is a major benefit to businesses – such as newer, smaller or seasonal ones – that may not have the revenue and earnings to qualify for the amount they need with cash-flow financing. ABL may be an excellent option for them. In addition, asset-based loans do not have the requirements that are common with cash-flow lending. There are no requirements to maintain certain levels of debt service coverage, for example. With an asset-based loan, lenders can minimize their concerns about potential defaults.
4. Cash flow flexibility. Most lenders do not restrict the use of funds from asset-based loans. While many businesses use funds from asset-based loans to purchase inventory and equipment, others use it to cover staffing and payroll, marketing, utilities and other day-to-day expenses. Still others use the funds to expand or update operations, develop new markets, or even to make a well-timed timed acquisition. The choice is yours.
5. Speed. Asset-based loans often are faster and simpler to obtain than other types of financing, particularly unsecured loans. If the loan is provided as a line of credit, you may be able to borrow against the amount extended to you as you need it, without going back to the lender every time. This agility allows companies to adapt quickly and fluidly to market shifts.

Addition to the financing suite

Smart business calls for smart use of assets. Manufacturers, dealers, retailers – virtually any business that works with inventory and equipment – may want to add asset-based loans to its suite of financing tools. Using assets to manage expenses and operations can help achieve overall growth goals.

Mitsubishi HC Capital America is a commercial finance company that provides customized solutions to help organizations of all sizes accelerate growth. Our experts throughout North America are leaders in the innovative use of ABL. If you would like to find out more about how ABL can help fuel you finance your inventory and equipment, contact us.