What’s an Asset-Based Loan and When Do You Need It?

by Kevin Smith Author

When a company needs short-term financing to pay current operating expenses or take advantage of a unique offer, an asset-based loan in Madison, WI, can be a great solution. These types of loans are usually easy to get, because creditworthiness is based on your customers and not your company’s finances.

What It Is

An asset-based loan involves lending money that is secured to an asset. The most traditional loan is a traditional mortgage, because it is secured by the house as the asset for the loan. However, for a company, this type of loan involves using assets that aren’t already tied to a loan. Of course, you can secure funding for a piece of equipment by pledging the equipment as the collateral, but for purposes of this discussion, asset-based financing is about converting receivables into available cash.

Your receivables are invoices you’ve already issued to your customers but they haven’t been paid yet. These receivables are assets to you, but sometimes you have to wait several months until you can collect the funds and use them for business operations. Asset-based financing can turn your receivables into money right now.

How It Works

After you deliver the products or perform the services, you invoice your customer. Normally, they have anywhere from 30 to 180 days or longer to pay you. If you don’t want to wait that long for the money, you can take these invoices and turn them into cash. This process is known as invoice factoring.

The factoring company gives you a pre-determined percentage of the invoice right now and collects payment on your behalf when it becomes due. In addition to receiving cash right away, you no longer have to deal with collecting on the invoice. Many companies use invoice factoring on a regular basis, because they can reduce their accounting staff and invoice collection hassles all at the same time.

When You Need It

You can take advantage of invoice factoring whenever you want. This process is most often used to bridge the gap during slow seasons or when you need to stock up on inventory. You can also use invoice factoring to raise capital quickly if you need to buy new equipment, hire more employees, or need funds to take advantage of a unique investment opportunity.

If you’re interested in applying for asset-based loan in Madison, WI, you can look for a local invoice factoring company to help. You don’t have to have good credit to qualify, because it’s all about your customers’ credit worthiness.