The Role of Asset-Based Lending in Maintaining Financial Liquidity

Maintaining financial liquidity is a struggle for businesses. However, liquidity is far more important for a business than cash on hand. Cash isn’t always enough. Improving your liquidity ratios will put your company in a better financial position for when there’s an emergency and cash is needed.

Asset based lending is a financing option that improves a company’s financial liquidity. Asset based loans are far more secure and can be obtained via private lenders.

What is asset based lending?

Asset based loans are when lenders provide a loan to a business on the basis of an asset used as collateral. These loans are secured, so in the event of non-payment, the collateral can be claimed by the lender. Inventory, receivables, equipment, machinery, and property can all be used as collateral for asset based lending.

The link between asset based lending and liquidity

When an entity is in debt, it can become insolvent. The borrower cannot service the debt since it’s low on liquidity. That doesn’t mean a company doesn’t have the mean; instead, they aren’t able to convert the liquid assets into cash immediately. Such a liquidity crisis is also known as cash flow insolvency, which results in having to file for bankruptcy.


How does asset based lending solve the problem?

Companies end up in a liquidity crunch more often than expected. They fall short on working capital or aren’t able to pay off other expenses due to a shortage of convertible current assets and cash. This doesn’t mean they are in a poor financial state, but rather that their money is tied up in long-term assets that aren’t able to convert as quickly.

Asset based lending takes on fixed or current assets as collateral to provide companies with cash to make ends meet. This gives companies more time to convert their assets and pay off the debt. In the case of non-payment, the lender can keep the asset while giving the company a fighting chance.

A revolving line of credit is the most common form of asset based lending used by companies. They take on debt, pay it off, and repeat this cycle until the life of the loan. These LCs are used to meet short-term fund requirements like working capital, paying off receivables, etc.  The key to success with asset based lending for your company lies in closely monitoring and evaluating cash flow.

Asset based lending is the preferred choice of financing for growing businesses. Global Capital Partners Fund has an international database of financing partners, which allows us to provide asset-based lending programs that meet the needs of your growing business.

Get in touch with them for other financing options like construction finance, permanent finance, and hard money loans in Des Moines, IA. Check out their recent deals or contact them at +1-800-514-7350.

Categories: Asset Based Lending

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