Unlocking the Potential of Your Business Assets
By: Steve Tomasello
Unlocking the Potential of Your Business Assets
In the dynamic world of business finance, the significance of working capital has never been more crucial for sustained growth. However, recent challenges such as rising interest rates and tightening credit conditions have made it difficult for many companies to maintain a steady cash flow. Looking ahead, these obstacles are likely to persist in the new year, making it essential for businesses to explore alternative financing options.
The good news is that most companies possess a valuable reservoir of liquidity within their business assets that’s just waiting to be unlocked. Alternative financing is the key to tapping into this potential. In this blog, we will explore various options that enable you to extract hidden value from your existing assets, providing quick, easy, and reliable access to vital working capital, irrespective of economic fluctuations and credit constraints.
Alternative Financing at Work
Before delving into solution specifics, let’s explore an actual example of alternative financing at work. Recently, a metal fabricator sought to increase its working capital in anticipation of increased sales volume. The company had a formula-based operating line of credit with a bank, allowing it to borrow against its accounts receivable and inventory. Despite being profitable over the past two years, the company needed additional liquidity to keep pace with the impending surge in sales.
To meet this need, the company sought to leverage the value of its equipment, approaching its incumbent lender for additional liquidity against these assets. Unfortunately, the request for additional availability was denied, creating a roadblock to accommodating the anticipated increase in sales.
The company turned to Oxford Commercial Finance (OCF) for a secured line of credit that would address its urgent liquidity needs without significantly increasing financing expenses. After conducting a comprehensive assessment of the company’s recent financial performance, OCF greenlit a formula-based line of credit.
This new structure allowed the company not only to leverage its equipment, but also its accounts receivable. This provided the necessary cash to accommodate the company’s surge in sales volume. At the same time, OCF opted to remove inventory from the formula calculation. This innovative approach not only eliminated the cost of inventory appraisal/field exams, but also reduced burdensome reporting requirements associated with financing inventory.
OCF’s strategic solution in this example showcases the flexibility of alternative financing. By understanding the unique needs of businesses and tailoring financing structures accordingly, companies can access the working capital funds they need while minimizing costs and streamlining operations.
Multiple Ways to Leverage Business Assets for Working Capital
The previous example highlights just one of the many ways alternative financing can be used to generate cash flow. Each of the solutions below offers a unique way to unlock liquidity from your business assets, catering to different needs and scenarios. Understanding the specific benefits and considerations of each option will help you determine the best fit for your business.
1. Asset-Based Lending
Asset-Based loans and lines of credit offer a fast and flexible financing option by securing funding with existing business assets. This collateral provides lenders with a layer of protection, making financing more accessible and affordable for companies that may not meet traditional credit criteria.
Considerations: Not all assets qualify as collateral. The most commonly accepted are accounts receivable, inventory, and equipment. The available funds are regularly assessed based on changing asset values.
2. Accounts Receivable (A/R) Financing
Ideal for businesses with extended payment terms or slow-paying customers, A/R Financing allows you to receive funds based on the value of your accounts receivable. This fast and transparent solution removes the burden of collecting from customers or taking on additional debt.
Considerations: This type of financing is best suited for companies with larger sales volumes and longer-term customer relationships.
3. Purchase Order (PO) Financing
Designed for businesses experiencing rapid sales growth, PO Financing provides upfront cash to cover the costs associated with fulfilling customer orders. This helps maintain cash flow and strengthens customer relationships.
Considerations: It is often only provided in conjunction with other working capital solutions and for completed products.
4. Leasing & Term Loans
Leasing and Term Loans offer flexibility for acquiring equipment without upfront costs, preserving cash flow for day-to-day operations. These solutions enhance cash management by replacing large upfront costs with steady lease or loan payments.
Considerations: Loan and lease amounts are based on the value of the assets being purchased or leased.
Strategies for Overcoming Common Challenges
When pursuing these financing solutions, be aware of potential challenges that can increase costs or delay approvals. Implementing the following strategies will help streamline the process:
- Identify Currently Leveraged Assets: Ensure that the assets you plan to use to secure a new loan are not already being used as collateral elsewhere. This will help avoid delays in negotiations.
- Choose Your Lender Before Completing Appraisals: Delay asset valuations until you choose a lender to prevent potential issues with changing values or incompatible appraisers.
- Budget for Due Diligence: Recognize the costs involved in due diligence for asset-based solutions and budget accordingly to avoid surprises.
Unlock Your Potential with the Right Financial Partner
Partnering with the right financial institution is crucial for unlocking the potential of your business assets. At Oxford Commercial Finance, our team of experienced financial experts specializes in tailoring flexible financing structures to the specific needs and assets of growing businesses. Discover reliable funds and continuous value to support and fuel your business success in every economy and at every stage of growth.
To learn more, visit oxfordcommercialfinance.com.